Balfour Beatty’s senior management have acknowledged that the strategic re-think announced along with a profits warning earlier this week could result in its Middle East and Hong Kong businesses being put up for sale in the future.
The group has laid out a new strategy of becoming a simpler "Anglo-American contracting business" with an investment division on top, a direction that gives its overseas contracting businesses an uncertain status.
On Tuesday, the 40 000 strong company revealed it had failed to adequately address poor performance in its regional construction and M&E sub-contracting businesses – and also that a strategic review had resulted in the decision to sell successful professional services business Parsons Brinkerhoff.
"The work has honed in on some key contracts revealing judgements in commercial reporting which frankly appear overambitious and fail to adequately recognise risks."
Nick Pollard
Profits for 2014 were forecast to be £30m lower than predicted just two months previously, a situation that made group chief executive Andrew McNaughton’s position untenable. The search is now on for Balfour Beatty’s third chief executive in 18 months.
Further details of the ongoing problems and the surprise decision to reverse its global strategy emerged from a teleconference with City analysts on Tuesday morning.
The analysts grilled executive chairman Steve Marshall, Duncan Magrath, chief financial officer, and Nick Pollard, chief executive of the UK Construction Services business.
Pollard said that, culminating in the Bank Holiday, the company had undertaken 10 days of “deep, intrusive reviews” of the Balfour Beatty Engineering Services projects, which had accounted for two-thirds of the £30m profits shortfall. He explained: “The work has honed in on some key contracts revealing judgements in commercial reporting which frankly appear overambitious and fail to adequately recognise risks.” He added that these contracts were not new, won in late 2012 or early 2013.
This had resulted in a “number of personnel changes”. “Many of the senior team have been replaced or are in the throes of being replaced including the commercial director and three of the five regional directors.” In addition, managing director Phil McGuire had stepped down.
But several of the analysts queried the way Balfour Beatty appeared to be “sacrificing” Parsons Brinkerhoff to solve problems in a completely different area of the business.
In the teleconference, Marshall said that the strategic review had taken place independently from the contracts review, and the two events had simply been announced at the same time.
"The board has been clear that we did need to look, and have looked at, all of the different parts of the Group, where there was logical synergy, where there were good arguments for releasing value and de-cluttering at the same time."
Steve Marshall
He told the analysts: “I realise that all this coming out on the same day feels like my god, they’ve been panicked into selling the crown jewel of PB and all of that. I repeat what I said earlier: the board has been clear that we did need to look, and have looked at, all of the different parts of the Group, where there was logical synergy, where there were good arguments for releasing value and de-cluttering at the same time.”
Balfour Beatty blames lack of “synergies” with the rest of the business for the decision to offload the profitable design and project management divison, revealing that only 5% of Parsons Brinkerhoff’s work was directly linked with the rest of the group.
One analyst asked if the board had thought about selling BBES instead, but Pollard said it had a key role to play in the group’s future. “The business has a very strong brand established over years as the leader in its sector through the previous brands of Haden Young and Balfour Kilpatrick. It has an offsite manufacturing state-of-the-art facility, good design and BIM capabilities and those things are right at the forefront of the drive from UK government and private developers in the UK for a slicker, more efficient construction industry.”
The company’s medium-term strategy was, in Pollard’s words, to “make Balfour Beatty a simpler, more focused business centred on its international construction and that’s largely Anglo-American presence and an overarching infrastructure investment business on the top”.
So one analyst questioned where this left Balfour Beatty’s operations in Hong Kong and the Middle East – would they ultimately be put up for sale too? Marshall indicated this could eventually happen. “So the Parsons Brinkerhoff process is going to take up our agenda for the balance of this year and all other options are on the table,” he said.
