Lendlease committed to selling Engineering and Services arm

17 June 2019 - 12:00 am UTC

Despite no material updates since February, Lendlease remains committed to selling its troubled Engineering & Services division, according to three sources.

The ASX-listed property developer is bent on exiting the civil construction sector and has received indicative bids from several local and offshore parties, said the first source close to the matter, who declined to say when bids were handed in.

The second source familiar with the situation, who works for an overseas contractor interested in bidding for Lendlease, and a third source familiar, who is advising another bidder, also confirmed the sale process is on track.

Lendlease, which said in the first quarter of this year that the E&S unit is “no longer a required part of Group strategy,” declined to comment on how the sale is progressing.

The sale process is continuing as Lendlease experiences cost blowouts on several major infrastructure projects it is building, including the AUD 11bn (USD 7.6bn) Melbourne Metro rail upgrade and the AUD 3bn Northconnex motorway tunnel.

Shares drop
Lendlease shares lost 2.1% last Friday after the Melbourne Metro cost blowouts were revealed, and are currently trading at AUD 12.84.

The Metro is going to cost more than AUD 2bn than originally expected to complete, a report by the Victorian Auditor-General revealed on 6 June. Geotechnical issues and a lack of skilled project managers were cited as reasons for the cost blowout.

“With at least five years of complex and risky construction to go, this raises some risk that the project may exceed the publicly announced AUD 11bn budget,” the Auditor-General report said.

Macquarie analyst Rob Freeman estimates Lendlease will need to book n AUD 300m provision in its accounts for the delays and cost overruns for its share of the AUD 1.7bn share of the project’s AUD 6bn first stage. “[The AUD 300m] represents about 17% of contract value which we believe is conservative,” Freeman wrote in a note to clients.

Cost blowouts
Lendlease already foreshadowed the cost blowouts on its major projects in late 2018, citing them as a reason for not going ahead with an AUD 500m bond issue, as reported. Other Lendlease projects running over budget include the AUD 1.1bn Gateway North Upgrade and the AUD 650m Kingsford Drive Upgrade. Both are located in Queensland.

The decision to sell the E&S division was announced by Lendlease Chief Executive Steve McCann on 25 February at its half-yearly results briefing. In March the company appointed Morgan Stanley and Gresham Partners as financial advisers.

An information memorandum has been released, but there is no set timetable for the sale other than a desire to wrap it up by September or October this year, said the first source close.

Lendlease estimates it will cost AUD 450m- AUD 550m to separate the underperforming division from the rest of the group so it can be hived off. The source close said it had received offers from parties interested in buying Engineering & Services as well as from those interested in other parts of the group.

JV hurdle
A potential hurdle for the E&S sale is that all of Lendlease’s joint venture partners, on its various infrastructure projects – including John Holland, Samsung C&T and Bouygues – must consent to a change of ownership, said one of the sources. This makes a deal tougher to execute but it is not an insurmountable obstacle, as John Holland demonstrated when China Communications Construction International acquired it in 2015 and had to get clearance from all of its JV partners.

There has been little concrete news regarding potential bidders although entities that have been speculated about include Japan-based Sumitomo’s construction business, South Korea’s Daewoo Engineering and Construction, Samsung and China State Construction and Engineering Company.

At its half-year results Lendlease split the engineering division out from its construction business, which reported an EBITDA profit of AUD 11.4m for the six months to 31 December. Including the engineering division, it recorded an AUD 473.7m loss. The division recorded negative EBITDA of AUD 437.7m for the period.

EBITDA margin
A sale teaser seen by Inframation sister publication Dealreporter said the division had a 5% EBITDA margin and AUD 3.3bn in annual revenue.

Meanwhile, the source said Lendlease’s board is not interested in pursuing a full corporate sale despite reports suggesting that a Japanese trading house, possibly Mitsui, had run the ruler over the company. Both companies subsequently issued statements denying any such talks were taking place.

An industry banker said it was difficult to imagine the AUD 7.36bn Lendlease being sold as a whole, because it is a diverse business that also encompasses property development and funds management.

Macquarie analysts on 14 May said Lendlease’s shares are worth AUD 18 apiece in the event of a full corporate sale.


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