Bargain hunters look to shrinking construction sector
By : Greg Goodale
The decline of construction stocks and a slowing market have made times tough for construction-sector mergers, but the downturn has opened the door to foreign bargain hunters.
With construction output in August down 11.2% on the same period in 2000, the construction index WIG Budownictwo is at its lowest since 1998, according to the Central Statistical Office (GUS) and the Warsaw Stock Exchange (WSE). Industry analysts said shareholders are finding sales to foreign investors preferable to mergers. They said the merger of Warsaw construction firm PIA Piasecki and construction group Mostostal Zabrze is in doubt because of opposition by Bank Handlowy, which owns more than 35% of both firms. Meanwhile, the merger of developer Echo Investment and construction firm Mitex, both from Kielce, was abandoned two weeks ago.
Arkadiusz Skowroń, a construction analyst at Dom Maklerski WBK, said the merger of PIA Piasecki and Mostostal Zabrze hangs in the balance as Bank Handlowy looks to reduce its capital portfolio. I think a merger of these two companies would be in their long-term interest, Skowroń said. Im worried that policy decisions have already been made to withdraw from capital investment and such a long-term deal may not be taken into account.
But an anonymous source at Bank Handlowy who is close to the deal said rumors were unfounded because no strategic decisions have yet been made about the merger. Bank Handlowy Public Relations Director Iwona Ryniewicz would not comment on the issue.
Additional audits of Mostostal Zabrze were blamed for the delayed announcement of the mergers share-swap ratio, originally scheduled for August, until November. Mostostal Zabrze looked to have a higher book value, Ostafiński said. But it transpired that these books do not reflect the true state of the company.
Mostostal Zabrze saw net profits of zł. 3 million ($714,000) turn to losses of zł. 31.7 million ($7.3 million) in the first half of this year. The company was forced to create reserves of zł. 38.4 million ($9.4 million) to cover outstanding payments from its contractors and as security against its ailing subsidiaries. During the same period, PIA Piasecki only managed to break even, despite boosting sales to zł. 80 million ($19 million) from zł. 52 million ($12.3 million).
Meanwhile, two weeks ago market expectations of a merger between Echo Investment and Mitex were dashed after news surfaced that Mitex is to be sold to French construction group Eiffage, which is to launch a tender offer for 75% of the Polish firm. Eiffage spokeswoman Elżbieta Michaud said two weeks ago that the company had received permission from the Securities and Stock Exchange Commission (KPWiG) to hold shares giving it more than 50% of votes in Mitex, but did not say when the tender offer would take place.
Michał Sołowow, the largest shareholder in Mitex with a 41.9% stake, was not available for comment at press time.
Bartosz Ostafiński, construction analyst at Beskidzki Dom Maklerski, said that given the current slump in stock exchange prices it is not difficult for Eiffage to offer Sołowow a premium. The prices of construction companies are low, while there is speculation that the (Eiffage) tender offer could be around zł. 16, Ostafiński said. Taking into account recent Mitex listings, this is a very attractive price. Mitex closed at zł. 13.70 Thursday.
Ostafiński added that Mitex, which posted second-quarter net profits of zł. 3.9 million ($928,000) this year, would not have been a good partner for Echo Investment as the only benefits from the partnership would come from administrative and marketing savings. When a developer is combined with a construction company there is always a conflict of interests, because developers want to keep construction costs low, while construction companies try to achieve the highest profit margins they can, Ostafiński said.
