‘They’ll struggle to find a buyer’: Richard Steer on the way forward for Lendlease

Building caught up with Gleeds chairman Richard Steer on what has arguably eclipsed the general election as the biggest construction story of the month: Lendlease’s decision to put its UK construction arm up for sale.

Although the business is one of the UK’s largest tier one contractors, it has been saddled by a string of problem jobs which could pose a risk for potential buyers.

It would presumably also have to change its name as Lendlease will still exist as a developer and investor in the UK, and there could be an exodus of top staff to rival firms.

In which case, Steer asks, what would a buyer actually be buying? 

Who would buy Lendlease’s UK construction arm?

“LendLease did have a big presence in the UK, which, unless they can find an appropriate purchaser with deep pockets, is going to present a problem in terms of untangling the business here, with their current level of commitments in the UK.

“That is unless it becomes a fire sale and in that case I still can’t really envisage anyone buying the firm from within the UK. It is possible you might well get an American contractor or more likely a European contractor who thinks that they want to extend their market from the EU into the UK. But I don’t think any of the UK contractors are doing particularly brilliantly to offer it a home.

“For instance we’ve seen firms like Mace seeming to pull back from construction and move on to consultancy. Another challenge in terms of attracting a buyer is that the returns are not particularly appealing within the UK construction market.

>> See also: ‘I’m at a loss about what to make of it all’ – Will Lendlease disappear from UK construction, and what would that say about the state of the sector?

“Since I cannot see Lendlease wanting to do anything other than get a sensible price they really will struggle to find, particularly from the UK, somebody who wants to purchase it. I really can’t see a lot of point in entering a very mature, relatively saturated market with arguably poor margins.

“Some of the French players might want to put a toe into the UK market, although I’m not sure that Brexit will particularly help fire up their enthusiasm. The only other option is that you might get a Chinese company coming to buy it so that they’ve got a Western organisation’s track record and brand equity that they could then harness to operate within the UK and across the world.

“I mean, LendLease has an established presence and brand value. But presumably, any buyer would struggle to keep the name because there’s still going to be LendLease operating in Australia. So you then have to ask what somebody would be actually getting if they bought it? There is some continuing work, but they would have to do an awful lot of due diligence to work out the value of that existing workload.

“So let’s assume you will have to drop the name, what have you bought? You might want to buy the team of staff, but the trouble is that individuals can leave. It could be that you end up paying for some challenging projects and the people that you think you are getting as part of the package could up working for some-one else within a month.”

What is Lendlease trying to achieve? 

“I think it’s a tactical decision by Lendlease, which probably shows that the market isn’t very good for construction, and for them to be pulling out of the UK, speaks volumes in itself.

“What they’re trying to achieve is reduced exposure to a not very good UK market and retrench back to Australia. I mean, they’ve had a good number of years but maybe they feel its run its course.

>> See also: Industry leaders caught off guard by Lendlease’s decision to sell UK construction arm

“I don’t know how their various specific projects are progressing but from experience I know you’d have to be very careful if you’re going to pick winners out their workload. I mean if the contractor is halfway through a job, you almost need them to finish that project to make an clean exit.

“We are also in usual circumstances here. Normally, in a situation like this, the contractor would have found a buyer and then announced it. The way Lendlease have chosen to make their announcement of being for sale and then try to pretend it’s business as usual is some-what counter intuitive. It’s not a good look for staff, clients or any potential buyer. It fosters insecurity.”

Could it be an managment buy-out?

“I would be very surprised if a management buy-out was an option, the senior management team at any business usually have a better idea of the strengths and weaknesses of their own firm and there is likely a reason they are not going this route. Also I’m not sure how they would raise the money for it they did. If you pursue that option then you’ve got to go to private equity or some other source of funds. And at the moment, interest rates are high and some of the contractors margins are down to 2%. Not too attractive for a potential lender.

“It’s easy to be wise when one is not directly involved but I am surprised that if they wanted to stay in the UK, they have not gone to one of the other big contractors and looked at a joint approach. Perhaps some sort of merger rather than exit the UK all together but I am not privy to their core strategy and maybe they just want a clean break.”