Builders warn of jobs collapse and slump in profits
Construction crunch: Tarmac and Wimpey confirm asset swap but prepare to add to the half-a-million jobs lost in the industry since 1990
Saturday 10 February 1996
Tarmac and Wimpey dealt the beleaguered construction industry a double blow yesterday as the UK's leading builders warned of hundreds of job losses over the next two years and said profits had slumped in 1995 after a worse-than-expected final quarter.
News of the cutbacks accompanied confirmation from the two companies of the dramatic pounds 600m asset swap they first announced last November. That deal sees Wimpey taking a huge gamble on recovery in the UK housing market, swapping its own construction and quarrying businesses for Tarmac's housing arm.
Confirmation of the deal's fine print sent Tarmac's shares 2.5p higher to 120.5p as analysts reflected on the group's improved geographic spread and its bullish cost-cutting projections. Wimpey slipped 5p to 135p in heavy trading, as the market focused on a promised collapse in its profits last year from pounds 45.1m to pounds 15.5m and a bigger exposure to the troubled housebuilding market.
Tarmac's profits for 1995 will also be worse than expected at pounds 65m compared with 1994's pounds 107.2m, mainly thanks to a pounds 30m provision against a disputed power station contract. Even before the contract write-off, underlying profits of pounds 95m will be below analysts' expectations of between pounds 96m and pounds 103m.
Although neither company was specific about job losses, both stressed the importance of cost reductions to the overall success of the swap. Industry sources believe more than 500 jobs will be eliminated, part of the 20,000 redundancies predicted by the Building Employers Federation for 1996.
Joe Dwyer, chairman of Wimpey, said he expected to make between 100 and 200 staff redundant in a phased programme over the next 18 months. Tarmac would only say that the numbers would run into the hundreds. About 4,000 jobs will be transferred from Wimpey to Tarmac as part of the swap, with about 2,000 going the other way.
More than half a million construction jobs have been lost since the industry entered the recession in 1990 and with cutbacks in the Government's road- building programme this year and still stagnant new housebuilding the slump is thought unlikely to end soon.
Neville Simms, chief executive of Tarmac, promised investors that the deal would not dilute earnings per share. He said that would mean cost savings of between pounds 15m and pounds 20m in the first full year of ownership of Wimpey's construction and minerals operations.
He added: "In a single move, Tarmac has achieved the divestment of its housing business and the immediate reinvestment into its chosen area of focus."
He denied one criticism of the deal, which suggests that Tarmac is pulling out of housing at the bottom of the market, missing out on the upturn to which Wimpey has doubled its exposure. Wimpey becomes the clear leader in the fragmented UK housing industry following the swap, with about 10 per cent of the market.
Defending the logic of the deal for Tarmac, Mr Simms said: "The asset swap gives Tarmac a strong financial base and solid asset backing from which to move forward. The group will be better balanced and the cash- generative qualities of the construction and minerals businesses will lead to a more predictable and reliable earnings stream".
Wimpey is being seen as the party taking on the greater risk, adding Tarmac's roughly 6,000 houses to the 7,600 it completed itself last year. Mr Dwyer said: "Despite dull markets in 1995, it is the view of Wimpey that 1996 should offer better trading conditions, and house sales in the early weeks of 1996 support this view."
The deal between two of the UK's biggest construction companies underlines the problems afflicting an industry that has seen an unprecedented number of large companies warning on profits, putting operations up for sale and withdrawing completely from the market. Tarmac first announced its decision to reshape itself completely last August with the stated intention of concentrating on its non-housing operations.
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