A 10 per cent fall in the value of Leighton Holdings over the past few days coincides with a downturn in work in the mining sector and a move by the construction giant's major shareholder, Germany's Hochtief, to quietly lift its stake above a symbolically important 55 per cent.
On Friday Orica announced a 10 per cent earnings downgrade, sparking fears of a second round of downgrades in the mining services and construction sector ahead of reporting season.
The first round of downgrades came in May when companies including Worley Parsons, UGL, Coffey, Calibre Group and Transfield Services all issued profit downgrades.
At the time Leighton maintained its guidance but it didn't stop the talk that it would be forced to follow suit, particularly given the potential under-claims it is exposed to in Indonesia, Australia and the Middle East. Leighton releases its half-year results on August 17 and more information will come to light then.
In Indonesia, Leighton stopped working in May at two coalmines controlled by Bumi Resources over a payment dispute. "The suspension of operations evidences Leighton's stated approach of seeking payment of under-claims and not allowing under-claims to accrue further," Leighton said. The two mines accounted for $345 million of Leighton's revenue in 2012.
The company continues to have issues in the Middle East in terms of trying to get paid for projects and in Australia the end of the mining boom has resulted in a number of companies mothballing projects, while others have either renegotiated contracts or started using smaller, more price-competitive contractors.
Against this backdrop the move by Hochtief on July 17 to officially breach a long-term gentleman's agreement with Leighton Holdings by increasing its stake above 55 per cent cannot be underestimated.
In some ways the relationship can be likened to Tolkien's Lord of the Rings, which is based on the story of a long-term strategy to conquer middle earth by controlling one ring that rules the other rings of power.
In the case of Leighton it is controlled by Hochtief, which in turn is controlled by Spain's ACS. To put it into perspective Leighton contributes more than 80 per cent of Hochtief's earnings.
The talk is that Hochtief will use Australia's creep rules, which allow companies that don't want to launch a takeover bid to buy 3 per cent of the shares every three months. It means it can swiftly move to 60 per cent, which would put it in a better situation to effect the law of the master of the rings, or in Leighton's case integrate it into a worldwide construction giant.
The record of ACS is that it pushes and pushes until there is no opposition. It received kickback from Leighton in March when three Leighton directors, including chairman Stephen Johns, resigned suddenly citing corporate governance issues.
At issue was a dispute about the nomination of a non-executive director and it culminated in Johns being told to resign by Marcelino Verdes, a long-time executive of ACS who now heads Hochtief and sits on the Leighton board.
The stoush was no doubt embarrassing for ACS and has manifested three months later with Hochtief breaching its agreement to remain at 55 per cent. If it creeps past 60 per cent the next step will no doubt be to appoint more directors on the Leighton board and thereby have more say in strategy.
It puts a new light on the restructure at Leighton announced in April, shortly after the board tussle, when Leighton's chief financial officer Peter Gregg was appointed deputy and more importantly put in charge of the Australian business, which accounts for the bulk of the company's earnings. The restructure was pitched as a way to allow Leighton's chief executive Hamish Tyrwhitt to focus on the group's global strategy.
Leighton watchers saw this as the next step in a grand plan to merge Hochtief and Leighton and create a worldwide construction group with Tyrwhitt responsible for the Asian and European part of the empire and Gregg responsible for the Australian business.
It is not the first time that Hochtief has proposed a merger with Leighton and it is unlikely to be the last. Three years ago, before the Spaniards were in control, Hochtief is understood to have made an unsolicited offer to merge the two companies. The offer was never disclosed to the market and was rejected by then chief executive Wal King on the basis that it lacked detail and was not in Leighton shareholders' best interests.
But that is history. Hochtief is now controlled by the Spaniards, who are billions of euros in debt and have been busy selling parts of the Hochtief empire. Since ACS turned up at Hochtief there have been many twists and turns at Leighton, and there will no doubt be many more as it moves to become the master of the ring. Minority shareholders will hope the increased power doesn't come at their expense.