Britain’s largest construction contractor has this morning announced the departure of chief executive Andrew McNaughton after just a year in post and initiated a strategic review that is likely to see it sell Parsons Brinckerhoff, the US engineering design firm that it bought for £380m in September 2009.
The two developments appear closely entwined but it is not yet clear whether Mr McNaughton has jumped ship because he disagrees with the strategy reversal or is being pushed because he is tainted by the failure of the acquisition.
He joined Balfour Beatty in 1997 after 12 years with Kier and was appointed to the board in 2009 as COO. A civil engineer, he succeeded Ian Tyler as chief executive in April 2013. He was credited at that time with “developing the group’s global strategy to move into higher growth sectors and geographies”.
Steve Marshall, Balfour Beatty’s non-executive chairman, will take over as executive chairman until a successor is appointed. Mr Marshall, like Ian Tyler, is an accountant. Nick Pollard, the former Bovis Lend Lease CEO brought in to Balfour Beatty last year to turn the UK construction business around, is in the frame to become the new chief executive and spearhead the new contracting-only strategy, although a total outsider may be preferred.
Balfour Beatty said this morning that although Parsons Brinckerhoff had “continued to be a highly successful business and has grown significantly under Balfour Beatty’s ownership” the expected benefits of having in-house design capability had not materialised.
In its statement, the board said: “As anticipated at the time of the acquisition, there has been growth in the market towards design and build and Public Private Partnership contracts. However, having professional services and construction capabilities combined within one organisation has not delivered material competitive advantage for the Group. Therefore, we are examining how best to realise the substantial value of the Parsons Brinckerhoff business. We will provide an update in due course.”
All this was accompanied by a profits warning as the UK construction business continues to underperform. The regional business is beginning to turn around after actions taken last year but the M&E and major projects divisions are now struggling, the board said.
Group pre-tax profits for 2014 are expected to be significantly lower than previous expectations, in the range of £145m to £160m.
In a trading statement, the company said: “The decline in profit expectations is predominantly within the UK construction business, where profits are now expected to be £30m lower than previously anticipated. Actions taken in 2013 to improve the operational issues in the UK construction business are taking effect, but at a slower pace than expected. There has been significant performance improvement in the regional construction business, but the mechanical and electrical engineering (M&E) and major buildings projects businesses have both experienced significant operational issues.
“In March we highlighted that the M&E business had been impacted by adverse market conditions towards the end of 2013. These conditions have continued into 2014 and, taken together with poor operational delivery issues on a number of contracts and low order intake, the business has experienced an extremely challenging first quarter. As a result, our performance expectations for this business in 2014 are significantly lower than previously anticipated. Furthermore, in major building projects we have experienced further cost increases and delays, mainly on specific projects we highlighted in March.”
Mr Marshall said: “Today’s trading update is once again disappointing. The board is committed to rapidly addressing the root causes. As a result, action is being taken to improve operational delivery in the UK construction business. Our recent strategic review meanwhile has concluded that a sale of Parsons Brinckerhoff could deliver attractive shareholder value and make Balfour Beatty a simpler and more focused group going forward.”