Construction begins consolidation wave
Construction firm Exbud is undergoing a boardroom shake-up after a private investor, Michal Solowow, said last week he had boosted his stake in the company to 10% and plans to merge his firm Mitex with Exbud.
In other quakes in the construction sector, Exbud competitor Budimex looks set to increase its stake in Mostostal Krakow to 62% from 47% by the first half of this year. But analysts said that the current wave of acquisitions would stay small and local for the time being, despite fears of foreign takeovers.
"In 1999 the process accelerated and (the sector) will continue to consolidate, but there will be no big-name mergers," this year, said Andrzej Kasperek, an analyst at Centrum Operacji Kapitalowych Banku Handlowego. "Large construction groups will (simply) take over small ones."
The construction sector is highly fragmented. The four best-performing companies, Exbud, Budimex, Mostostal Warszawa and Mostostal Zabrze, together have less than 10% of the market, with Exbud and Budimex on top at 2.2-2.3% and 1.8-2% respectively.
While Budimex CEO Marek Michalowski said two weeks ago that he thought his company was vulnerable to a takeover by a foreign firm seeking an advantage in bids for lucrative state contracts, analysts dismissed that possibility for the near future. They said that, for the time being, foreign investors would not buy into all-purpose construction firms and will wait until such companies have at least 5-10% of the market.
"Foreign investors don't have to buy a large group operating in many areas. They want to build roads and motorways," Kasperek said. "Buying a general construction firm is a waste of money."
He said that the prospect of coughing up hundreds of millions of zloty for a firm with a 2% market share was laughable at best.
But foreign firms are increasing their presence on the market. The sector has already seen two foreign acquisitions this year. German company Walterbau signed a strategic alliance with Betonstal, and Swedish firm NCC purchased road builder Przedsiebiorstwo Robot Inzynieryjnych (PRI). In addition, foreign investment group Baupost and U.S. investors Templeton control 6.2% and 6% respectively in Budimex.
In the meantime, attention is focused on Exbud's internal wranglings and Solowow's gradual takeover of the firm. Solowow, with 10%, is the biggest investor in the company, 89% of which is publicly traded, Kasperek said. Analysts said that the current dispute stems from bad managerial decisions and a tug of war between Solowow and Witold Zaraska, who has run Exbud for 23 years.
Over the past few years the firm has bought several companies to enlarge its market share, but these moves have not brought the company the returns it was hoping for, said an analyst who did not want to be named. "Exbud bought them three years ago, and nothing has happened. The results were very poor," the analyst said.
Now the firm should busy itself with getting rid of some of them, starting with the Odlewnie foundry, and accept the offers Solowow has put forward, the same analyst added. Solowow has a good investment track record with companies Mitex and Echo, and will modernize Exbud faster than current management, the analyst said.
Exbud's situation is somewhat similar to that of Budimex's a few years ago, before Budimex turned itself around with a spate of mergers, said Rafal Jankowski, an analyst at CDM Pekao Securities. "A few years ago Budimex was viewed as one of the poorest firms on the market," he said. "Now the cost of its shares are almost the same as Exbud's." Budimex closed Friday at zl. 34 per share, down 4.2% on the week, while Exbud showed no change at zl. 35.5.
In 1999, Budimex absorbed subsidiaries Budimex Poznan and Unibud, based in central Poland, to streamline operations. The company intends to increase its stake in Mostostal Krakow to strengthen its position in Silesia and elsewhere in the south, where many infrastructure and industrial construction investments are expected in the next five years. With the purchase of 62% of Mostostal Krakow, Budimex's aborted merger with Silesia-based Mostostal Zabrze last year would have been rendered less crucial to the firm's strategic goals, Jankowski said. "The changes are very positive, and (Budimex) has shown it was able to implement them successfully," Kasperek said. "This is what the market liked most."
Budimex is forecast to have a net profit of zl. 61 million ($14.88 million), up 10.9% and carries a "buy" recommendation from both CDM Pekao Securities and COK Banku Handlowego. Based on Friday's closing stock prices, Budimex carries a price to earnings (p/e) of 11.03, while Exbud has a p/e multiple of 10.05.
