黑洞社区

Speaking to 黑洞社区 in 2015, the then relatively new chief executive of famously conservative contractor Kier, Haydn Mursell, waxed lyrical about his experience and competence at executing mergers and acquisitions. Dealing with the City investors was his 鈥渃omfort zone鈥� he said. 鈥淚f you do M&A properly,鈥� he asserted, 鈥渢hen it is very, very beneficial to a group.鈥�

Last week, however, Mursell unexpectedly stepped down as Kier鈥檚 chief executive after just four and a half years at the helm of the 拢4.5bn turnover construction business. All the signs are he was forced out following a shareholder revolt over a much-criticised attempt to repair the firm鈥檚 debt-laden balance sheet 鈥� debts taken on to fuel Mursell鈥檚 four-year acquisition spree. 

Left with nearly 拢400m of debt after Kier鈥檚 three big acquisitions, Mursell was forced into a last-minute rights issue when its lenders decided to pull in their borrowing, and paid the price for its failure to attract investors. Shares in the firm fell in value during his period in charge. So what really went wrong and how can the firm look to restore its reputation for stability with both the City and clients? 

鈥淸Kier鈥檚] problem is everyone is looking for the next Carillion. The rescue plan wasn鈥檛 sufficient, it was unconvincing鈥�

Tony Williams, 黑洞社区 Value

Conservative

From the 1992 management buy-out which separated it from brick-maker Hanson until its 2013 bidding war with rival Costain over services business May Gurney, Kier was a byword for solidity and reliability in the often fraught world of contracting. Growing organically rather than by acquisition, it was known as a good payer untempted by the clever accounting practices used by some to flatter their balance sheet. One city source says: 鈥淚t was a much loved and very conservative construction company with an aversion to debt, straightforward reporting and a tendency to run a mile from risk.鈥�

However, in the period after Mursell was hired as chief financial officer from Balfour Beatty in 2010, the board under then chairman Phil White decided to change tack, setting out to create a much larger company where the risk of low margin contracting was balanced out by higher margin property and services businesses. When former chief executive Paul Sheffield left the business in 2014, in part it is understood because of reservations over the growth strategy, Mursell was promoted to the top job with the brief to deliver on the ambition.

Also read - Interview: Haydn Mursell (2015)

Under his leadership, Kier鈥檚 turnover more than doubled as he changed it from a regional contractor to a building, FM, housing and property giant. So far, however, the company has arguably not felt significant benefits, with two loss-making years in 2016 and 2017, and a pre-tax margin last year lower than reported in 2012 before the spending spree. A spokesman for the firm, however, contested this interpretation, pointing out that underlying profit 鈥� before exceptional items 鈥� has risen by an average of 16% since 2014, and that 40% of profit now came from highways and utilities work inherited from the Mouchel purchase.

Either way, the firm鈥檚 debt ballooned from the cost of the acquisitions 鈥� with May Gurney costing 拢221m, highways engineer Mouchel costing 拢265m and utilities contractor McNicholas rumoured at a further 拢15m-20m. One senior contracting source said: 鈥淭he industry felt these were pretty expensive buys. Ultimately they never improved margins.鈥�

鈥淭hey [the institutions] will have needed to send a message that someone has to pay for this, and they wanted to protect the money they鈥檇 put in鈥�

Kevin Cammack, Cenkos

Debt

The impact on its balance sheet was particularly severe because the businesses it bought, and the places it chose to invest, were capital-hungry activities such as services and property development, with potentially higher margins but the propensity to suck out cash in the short term. At the same time, it had to weather nearly 拢90m of losses from problem jobs in the Caribbean and Hong Kong businesses. Where Kier could in 2012 claim average net cash 鈥� cash in the bank minus its debts 鈥� of 拢95m, by June 2018 this had fallen to an average net debt of 拢410m. In other words, a 拢500m worsening of its balance sheet.

In happier times, Kier might easily have weathered this level of borrowing, particularly given that the borrowing was backed by tangible assets in the form of long-term services contracts and development sites. But the collapse of Carillion changed everything. This put the focus firmly on debt levels and forced Kier to last summer launch a multi-year strategy 鈥� Future Proofing Kier 鈥� designed to bring debt down. Tony Williams, investment banker and analyst at 黑洞社区 Value, says: 鈥淭heir problem is everyone is looking for the next Carillion. The rescue plan wasn鈥檛 sufficient, it was unconvincing.鈥� A spokesperson for Kier said the business was hitting its profit and debt targets, but admitted that: 鈥淭he market appetite for debt has changed following Carillion.鈥� Cenkos analyst Kevin Cammack says: 鈥淢ursell thought that would be enough to see off the short-sellers. But it became very clear they hadn鈥檛 gone far enough, and the business needed to seriously de-gear.鈥�

Rights issue

Two other events seriously impacted Kier at this point. Firstly, the government made clear it needed to improve its payment terms after data was published revealing it took an average of 54 days to pay its suppliers 鈥� way beyond the government鈥檚 official 30-day limit. Kier鈥檚 own brokers, Liberum, said in a note published last week that fixing this will require a 拢70m cash injection. Even more seriously, Kier鈥檚 lenders made clear they wanted to reduce the amount they were lending it, as part of a post-Carillion strategy to reduce their exposure to construction. Former Balfour Beatty UK construction chief executive Mike Peasland says Kier wasn鈥檛 the only firm affected. 鈥淭he banks were pretty edgy on construction, the whole sector was under a cloud.鈥� One former senior Kier executive says: 鈥淢y understanding is that the banking sector has said pretty uniformly that it wants to halve its exposure to the building industry. Replacing debt has become very difficult.鈥�

All these factors conspired to produce the shock Friday afternoon announcement at the end of November that Kier was issuing new shares in a bid to raise 拢250m 鈥� diluting the value of existing shareholders鈥� stakes. 鈥淚t was badly handled,鈥� says Cenkos鈥� Cammack. 鈥淚t was very close to Christmas, at the end of a really bad quarter. The City鈥檚 assumption is that for anyone to do it at that time, they do it out of panic.鈥� 黑洞社区 Value鈥檚 Williams says: 鈥淣o-one puts out a rights issue last thing on a Friday. It was desperationsville.鈥� 

Kier, for its part, justified the timing of the rights issue at the time, saying the new money needed to be registered on the firm鈥檚 end of year balance sheet 鈥渋n order to enable the group to be better positioned, in light of a tighter credit market and more stringent tender pre-qualification requirements, to win new business鈥�. 

Accordingly, investors reacted badly, with few signing up, despite the offered new shares being heavily discounted. So spooked was the City, that within days the official share price had fallen below the offer price, and ultimately only 38% were taken up 鈥� leaving the underwriters having to step in and buy the remaining shares 鈥� a real City no-no. 鈥淚t鈥檚 pretty unusual not to have a rights issue oversubscribed,鈥� says Cammack, 鈥渁nd a quick way to piss off a number of institutions. They [the institutions] will have needed to send a message that someone has to pay for this, and they wanted to protect the money they鈥檇 put in. I think they weren鈥檛 convinced that Haydn would be able to resist the temptation and revert to type with more acquisitions down the line.鈥� 

While the fact it was underwritten meant Kier got its 拢250m, Mursell had by then overseen a near 80% collapse in the firm鈥檚 share price since taking control. A spokesperson told 黑洞社区 that the rights issues 鈥渨as required following a change in market sentiment,鈥� and that as a result 鈥淜ier entered 2019 with a strong balance sheet.鈥� However, Mike Peasland says: 鈥淨uite simply he [Mursell] paid the price for the rights issue born out of the debt accrued by the acquisitions made since 2014.鈥�

Sell off

Since Mursell鈥檚 departure, most observers have suggested the firm needs to retrench with a return to the steady and predictable concentration on delivery typified by the business pre-2013. Given that Liberum鈥檚 note predicts it will still record an average net debt of around 拢275m for the 2019 full year results (to June this year), it will still need to focus on bringing in cash, limiting investment and cutting costs. 鈥淭he new chairman has got to bring someone in willing to run it more tightly from a  cash point of view,鈥� says Cammack. 鈥淚t鈥檚 about re-imposing the discipline of the old Kier business.鈥� Williams says: 鈥淚t鈥檚 a fine, fine business that鈥檚 been squandered. Now it鈥檚 got to attend to some basic housekeeping.鈥�

Analysts are split, however, on whether the new chief executive will want to go even further to repair the balance sheet, by looking to sell key parts of the business brought together under Mursell鈥檚 tenure. Kier has declined to comment on reports at the weekend suggested the firm was already looking to offload its affordable housing maintenance business. The former senior Kier executive said: 鈥淭he number one target has got to be to repatriate cash, so there鈥檚 lots of talk about selling bits of the business. I wouldn鈥檛 be surprised if the new chief executive decides he doesn鈥檛 want all three business units [of contracting, FM and property]. Construction and services are really the core, while property consumes a lot of cash.鈥�

However, Cammack says that with City sentiment weak, finding a buyer willing to offer a fair price for its property and housing assets would be difficult, making a sale unlikely. 鈥淚f Kier wants to take cash out of the property business, it鈥檚 probably best in the current environment to trade out of it, rather than attempt a sale,鈥� he says.

Most observers agree that, despite its stock market woes, Kier at an operational level remains a very sound business. Hence with the rights issue having mostly repaired its balance sheet, there is the opportunity for a new chief executive coming in to fairly quickly turn its fortunes around. The former Kier insider says: 鈥淚n terms of the business plan, 2019 was probably always the low point in the cycle. From here things improve and it鈥檒l be a lovely job for someone to walk into.鈥� Williams says: 鈥淜ier could go anywhere from here. Anybody coming in could be a hero鈥�. 

The big question is who will get that chance? For the moment, chairman Philip Cox is acting as executive chairman. Cox said: 鈥淭he board believes that, following the completion of the recent rights issue, now is the right time for a new leader to take Kier forward to the next stage of its development.鈥�

But with Kier鈥檚 top team selected by Mursell and closely involved in the rights issue, analysts see an internal appointment as unlikely. While it is very possible Kier may look to hire from outside the sector, as Balfour Beatty successfully did appointing Leo Quinn, speculation is already focusing around one name in particular 鈥� former Wates boss Andrew Davies. 

Davies, who has also worked at listed giant BAE Systems, left Wates to take the top job at Carillion. However, before he could join, the company went under, leaving him without a role and potentially free to start quickly. The Kier insider says Davies is the 鈥渘ame on everyone鈥檚 lips鈥�, while Williams says his unflashy and steady approach combined with his listed company experience, would make him popular with the City 鈥� seen as a key attribute. 鈥淗e鈥檚 a builder of businesses,鈥� says Williams. 鈥淗e鈥檇 be perfect.鈥�

Kier declined to comment on the recruitment process for the next chief executive. So, whether Davies, who himself also didn鈥檛 respond to attempts to contact him for this piece, will be given the chance to return Kier to former glories, is yet to be seen.