Costain awaits its fate after losses reach £180m

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The Independent Online
The prospect of Costain, one of the great names of the UK construction industry, ending the year as an independent company all but disappeared yesterday as the group announced a £180.4m loss after a huge write-down of the value of its US coal mining assets.

Analysts said the West Kentucky mines would almost certainly be sold in the autumn after a six-month period of profitable trading following a disastrous trading performance in 1994. With Costain stripped down to its construction and engineering core a disposal of the remainder is expected to follow.

Talks with potential bidders for the company, worth over £600m at the height of the 1980s building boom and now valued at only a tenth as much, stalled recently after Costain failed to find a bidder for the US mines.

The company has never disclosed the identity of the possible buyer although Bovis was widely tipped. Other rumoured predators include the German Hochtief group and Mohamed Abdulmohsin Kharafi, Kuwait's largest building group, which snapped up a 7.5 per cent stake in Costain last month describing the holding as a passive investment.

Some observers think the disappearance of Costain could mark the beginning of a long overdue rationalisation of the UK contracting industry, which has been dogged by excess capacity throughout the recession. Industry leaders say that until a big shake-out occurs, contracting will remain largely unprofitable.

The loss, which follows red ink in all but one of the past four years, was struck after a £141.6m write-down of US assets before a £38.3m goodwill write-back to reserves. The net £103m write-down reduced net assets at the December year-end to £102m, representing about 19.5p per share.

That compares with Costain's share price of 12.5p per share after a fall yesterday of 1.25p on the announcement of the loss. Analysts pointed out, however, that the value of Costain's assets is questionable, with about 7p per share accounted for by a pension fund surplus and part of the remainder accounted for by a one-third stake in an undeveloped property site in the City of London widely thought to be optimistically valued.

The latest bad news from Costain casts doubt on the futures of Peter Costain, chief executive, and Sir Christopher Benson, chairman, although it is thought that they will remain with the company as long as it remains independent.

After a reduction in turnover from £1.14bn in 1993 to £974m last year, operating profit from construction and engineering fell to £6m (£10.6m). US mining, however, lost £40.4m (£7.4m loss) after a sequence of weather and production problems.

Alan Lovell, finance director, said the problems had now been ironed out and, with the workforce of the subsidiary down from 1,260 to 910, the business was now trading profitably.

Investment Column, page 17.