The slow Spanish takeover of Australia’s biggest construction company, Leighton Holdings, is all but complete with this morning’s termination of CEO Hamish Tyrwhitt and CFO Peter Gregg, and the declaration of a sweetened bid that is now unconditional.
All that remains, apparently, is for eager minority shareholders to take their $22.50 and for the Foreign Investment Review Board to clear the bid — probably a formality given control has clearly already passed to the ultimate parent company, Spanish construction giant ACS, the fourth-biggest construction company in the world.
Except for one thing: the full implications of a consolidation of Leighton for competition in the construction business may not yet have dawned on everybody, but they were highlighted by the release today of a draft Productivity Commission report on public infrastructure (see chapter 10, volume 2).
Leighton has a major share of the country’s construction market, covering commercial building and public and private infrastructure from desalination plants to road, rail and port projects.It has built up this market over decades, including through the successive acquisition of rivals including Thiess in 1983, John Holland in 2000 and Transfield Construction in 2003 — all deals that were cleared by the competition watchdog.
Instead of integrating these businesses, Leighton kept them as separate competing divisions — which would even bid against each other on large projects — to soothe market and regulator concerns about the potential for collusive tendering or bid-rigging, highlighted by the early-’90s Giles royal commission in New South Wales.
But as Leighton has grown, so have concerns — particularly among small contracting firms and subcontractors — that its market power is simply too great. After taking submissions, the draft Productivity Commission report does find that on some estimates the market share of Leighton and next-biggest-rival Lend Lease, of up to 60%, “would appear sufficient to allow them to exercise market power to inflate prices and/or profits”.
With Prime Minister Tony Abbott wanting to ramp up infrastructure spending, and another royal commission into the building industry, this is a significant issue.
Leighton has been a train wreck since the departure of legendary chief Wal King, who managed to build the company up from next to nothing. It’s now clear, however, King left some dirt under the carpet, and the company has been mired in management turmoil, write-downs, litigation and most recently allegations that some $42 million kickbacks were paid to secure contracts in Iraq.
The ownership structure of Leighton Holdings is complicated, but it boils down to this: it is majority owned by long-standing German shareholder Hochtief (a construction firm that kept its hands off Leighton’s management by agreement), which in turn is majority owned by ACS. Hochtief owns 59% of Leighton and wants to increase that to 74%.
Leighton cannot stay out of trouble, with ACS’ bid apparently leaked, going by last Friday’s sharp spike in the Leighton share price ahead of Monday’s announcement, now the subject of an investigation by ASIC.
ACS has already signalled it will review the structure of Leighton. The review will focus particularly on “whether existing operating businesses of Leighton can be more efficiently structured”, including potential for streamlining and consolidation of Thiess and John Holland.
Competition concerns are only going to increase.