European Powers of Construction 2006

Deloitte’s European Construction and Infrastructure Group is pleased to present its fourth annual publication on the "European Powers of Construction". The report identifies the 100 largest construction companies in Europe and provides economic and industry insights into the European marketplace.

The report is based on data from public sources, such as annual reports and economic figures from OECF, FIEC and Eurostat, and from national economic and construction institutes and websites. Alongside our analysis of this data, we provide commentary from Deloitte industry specialists throughout Europe.

The annual review of the top European companies shows that in terms of the number of companies the French, led by VINCI and Bouygues, dominate the top ten with the UK dominating the top one hundred.

Seventy-six of the companies reported revenue growth. VINCI reported an additional €3.3b. Average net income in 2005 was 3.7%, up from 3.2% in 2004, with the higher income percentages concentrated in the mid-sized companies which averaged revenues of between €2b and €5b.

For the second year, we also include interviews from senior executives involved in the industry in Europe. From France, we spoke to Xavier Huillard, the Chief Executive of VINCI, from Spain, Joaquin Ayuso, the Chief Executive of Ferrovial Group, and from the UK, Mike Welton, the Chairman of Hanson plc and former Chief Executive of Balfour Beatty plc. We also spoke to Ian Durant, the Chief Financial Officer of Sea Containers and former Non-Executive of Westbury plc. All provide an interesting insight into the industry and we would like to thank them for the time they gave us.

For the first time we have an article on the European house building sector. The picture across Europe is evidently mixed as the development of the market is dependent on several factors including the extent and form of government subsidies, demographic trends and the structure and intensity of demand. Unfortunately for the speculators out there, we cannot predict the movement in house prices in each country. However, whilst it may not drive growth in the industry over the short-term, this area of the market remains extremely important to the health of the industry as a whole.

One area that is expected to lead growth across Europe is the use of Public Private Partnerships (PPPs) to tackle Europe’s increasing requirements to renew and expand its infrastructure. In an article on the European market, we see that increasingly, countries are putting the building blocks in place and slowly a number of significant projects are being bid. The immediate growth areas appear to be Spain, France, Germany and Italy with, not surprisingly, the biggest long-term potential in central and eastern Europe. The UK market continues to be strong in this area. The recent key development has been the ever increasing rise of the secondary market for PFI/PPP investments. In our article on this topic we examine some of the current trends and factors that influence the UK and which may provide clues as to how secondary markets will develop across Europe.

Finally, we have updated our prior year article on the IFRIC (International Financial Reporting Interpretations Committee) assessment of accounting for service concession arrangements. Last year there was the financial asset model and the intangible asset model. This year we see the introduction of the "bifurcated model" – a combination of financial and intangible assets.

Financial, risk and governance management are nothing new; robust management of these areas is simply good practice and can give companies competitive advantage. But there continue to be examples of companies in the construction industry failing or significantly adjusting their balance sheet position. Is this because of unsustainable expectations from the financial analysts, or because in a highly judgemental industry, optimism gets the better of strong management?

Undoubtedly, thin profit margins, fierce competition, risk of overtrading, unpredictable cash flow, regular contract disputes, challenges with fixed price contracts, and the increasing complexity of contracts have created a tough operating environment. Extending last year’s corporate governance theme, this year we look at some of the causes of construction business failure in the UK and, following a review of approximately 100 Danish and Nordic contractors/developers, we review the benefits of a systematic risk management process.

The sustainability agenda provides industry with a significant challenge in terms of the development of deliverable solutions within a complex, rapidly-changing and often misunderstood operating environment. In recent years, the debate has become more prominent in the political landscape, and the need for overt corporate responsibility in this arena has emerged. Our final article provides an overview of the sustainability agenda in the construction industry.

We hope you find the publication of interest. Please contact me, or any of our industry practitioners across Europe, if you want to comment on any of the matters we discuss here: all suggestions are welcome.

So which construction companies were the best performers in Europe in 2005? There was no change at the top, with VINCI remaining the largest company in terms of construction revenue. Consolidating its position, it once again increased its lead over second-placed Bouygues. Skanska fell for the second year running, overtaken by Hochtief and slipping to fourth place due to weaker revenue growth than its peers.

There have been other changes in the top ten as a result of varying rates of revenue growth, but the list retains a French flavour with Eiffage in sixth place. No other country has more than a single representative and – with Balfour Beatty slipping from eighth to 11th place – there is no longer any British presence in the top ten. Despite having no construction companies among the very largest, the UK does have an even stronger presence in the top 100 than in 2004, with 36 companies represented. However, this does not translate into a corresponding dominance of the European market, with UK companies representing only 24.9% of the total revenue for the top 100, thus suggesting a greater degree of fragmentation in the UK market.

The UK share is only slightly more than that of the 11 French companies which have 22.1%, reflecting different national industry structures and the sheer size of the two leading French companies, both of which have a greater breadth of international operations and a more diverse range of services than their UK counterparts. Indeed, the combined construction revenue of VINCI and Bouygues represents more than 14% of the total for the entire top 100, and the construction revenue of VINCI is nearly three and a half times that of the largest UK contractor, Balfour Beatty.

There is considerable variation in average construction revenues for the remaining countries. Again, this reflects different industry structures and the presence of major international contractors – particularly in the case of some of the smaller countries, for example, Skanska in Sweden. The markets in Belgium and Portugal are relatively small and their companies do not have as extensive an international operation as some of the major European players. In Spain and Italy, the domestic markets are relatively closed to foreign companies, but whereas there are a number of Spanish companies with extensive international operations, the largest Italian company (Impregilo) is only 32nd in the top 100.

Of the top 100 companies, 76 reported revenue growth – and of the top ten, only Koninklijke BAM showed a decrease. As might be expected, the largest overall increases were reported by the biggest companies, with VINCI reporting an additional €3.3b. Spain’s Grupo Isolux-Corsán, in 51st place, reported the largest relative increase at 90%, and Bovis Lend Lease reported an increase of 49.9%. Due to the ongoing consequences of extensive restructuring, Jarvis saw the largest relative decrease in revenues – at 51.7% – while MJ Gleeson reported a decrease of 35.1%, following its withdrawal from general contracting and the sale of its building and rail businesses.

The construction industry is particularly sensitive to the wider economic climate and many companies have made efforts to diversify or offer higher value services that provide more predictable revenue streams. This has led to some increased merger and acquisition activity, one interesting example being the acquisition of the UK’s largest airport operator, BAA, by Ferrovial Group of Spain. In the case of Bouygues, construction remains just one of five group businesses, and diversification extends as far as media (the main French national national television channel) and telecommunications (a major mobile communications operator).

The average net income in 2005 was 3.7%, up from 3.2% in 2004. It should be noted that the figures quoted are for the companies’ entire revenues, rather than just construction revenues, as in some cases construction forms only part of a company’s business. The higher income percentages of the mid-sized companies (third tier, construction revenues €2-5b) and the lower than average income percentages of the larger companies tend to support the idea that big is not always beautiful. However, more careful analysis reveals that this is not the full picture. Higher income percentages in the third tier are driven by the number of large UK house builders that fall within this group. House building has a very different business model to general contracting and has traditionally achieved much higher margins. Furthermore, consolidation in the UK house building sector has led to less fragmentation than in the nonhousing sectors, and the market is now dominated by a smaller number of companies. The higher income percentages of the house builders drive up the overall UK average and the average for the top 100 tiers in which the house builders fall.

The same effect is evident in other countries. While Bouygues, for example, is active in the housing sector, the sector does not form a sufficiently significant part of the company’s operations to have a marked effect on margins – nor is it clear whether companies in other countries specialise to such an extent.

It is difficult to draw conclusions on how income percentages vary from one country to the next because of the relatively small sample sizes for most countries, and the fact that many of the larger companies have extensive international operations. The larger companies arguably have more in common with peers of comparable size and scope of activity across Europe than with other companies from their own country. However, regardless of country, most of the higher income companies without housing sector interests are specialists such as Jan de Nul or infrastructure operators such as Société des Autoroutes Paris-Rhin-Rhône.

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