Cover story

POWER of ACQUISITION

In recent years, Murray & Roberts has acquired significant capacity to position itself for opportunities that are now being realised in its selected markets. Robust explores the extent to which new acquisitions will enable the Group to deliver its value proposition beyond 2010

Earlier this year, Murray & Roberts became the 39th largest company listed on the JSE, entering the hallowed Top 40 index in terms of market capitalisation. This landmark event, scarcely contemplated a few years ago when the share price was languishing, has been brought about primarily as a result of some astute acquisitions as the Group has efficiently deployed capital and cash reserves released by the disposals of Unitrans in 2004 and other non-core businesses.

Earlier this year, Murray & Roberts became the 39th largest company listed on the JSE, entering the hallowed Top 40 index in terms of market capitalisation. This landmark event, scarcely contemplated a few years ago when the share price was languishing, has been brought about primarily as a result of some astute acquisitions as the Group has efficiently deployed capital and cash reserves released by the disposals of Unitrans in 2004 and other non-core businesses.

Being in the Top 40 has an accelerator effect – many index-traded funds and fund managers are forced to buy the stock, which has added additional momentum to a share price that was already in an upward trajectory. But it also creates enormous expectations of consistent “blue chip” performance.

It is this expectation that is exercising the minds of Murray & Roberts executives as they look beyond the 2010 Soccer World Cup for growth that will smooth out the historic cyclicality of the construction industry.

Murray & Roberts has had a successful run of acquisitions, explains group chief executive Brian Bruce: “With the benefit of hindsight, the acquisitions of Concor and Cementation now seem inspired. And I believe that in time the purchase of Clough will be seen in the same light. Clough is still troubled, but we’ve achieved much in setting that company up for a great future. Since July, it has already become the biggest company in the Group by a factor of two. All the building blocks are in place for it to soon start contributing its rightful portion of group profit.”

These three companies will deliver 25% of group profits this year. To put this in context, these profits are already double what they were when the acquisition trail began. But this is by no means the end of acquisitions for Murray & Roberts. The global construction industry is evolving too fast for any company to remain static.

Globalisation often poses political challenges. With massive infrastructure projects in the pipeline locally, and the focused pressure of meeting 2010 deadlines, government expects companies such as Murray & Roberts to repatriate their resources for the national interest. Local investment analysts are constantly asking the same question, because nobody wants the World Cup to be a failure.

“Murray & Roberts has had a successful run of acquisitions. With the benefit of hindsight, the acquisitions of Concor and Cementation now seem inspired.”

“The direct answer is that we cannot. We’ve globalised too far: it is our very global presence and global partnerships that today clinch contracts, whether in South Africa or elsewhere, and those resources are needed where they are. The World Cup is simply one important element of a broader strategy.”

GLOBALISING MURRAY & ROBERTS

What has been driving the Globalising Murray & Roberts strategy? While the construction industry remains relatively fragmented around the world, the same cannot be said of the industries currently undertaking major capital expenditure projects. For instance, more than 50% of the global mining industry is controlled by just three companies.

This in turn is driving the consolidation and globalisation of construction: the last place a global client is likely to look for a contractor is South Africa, even for a project in South Africa.

“Globally, the construction industry is currently focused on acquisitions. We’re in the fortunate position of being ahead of the curve. Nonetheless, that curve is always present and we have to continue on the acquisition path,” says Brian.

CAPACITY TO DELIVER

“We win tenders because we’re known globally, have a reputation for capacity and delivery, and because of our “We win tenders because we’re known globally, have a reputation for capacity and delivery, and because of our

What drives the acquisition strategy? Murray & Roberts has identified its key growth markets as the construction economies of Southern Africa and Middle East and the specialist mining and energy natural resource markets of South Africa, Australia and Canada. Acquisitions enable the Group to strengthen its position within the selected regional markets and to grow its global footprint in the resources-driven markets. Every Murray & Roberts business conforms to one of these strategies.

Murray & Roberts Engineering Solutions, for instance, provides a local solution for global companies but also offers global capacity through its network of global engineering partners. Brian admits this business is unique in being focused on South Africa, “and that’s a risk”.

CEMENTATION

The acquisition of Cementation has been one of the success stories of the turnaround of Murray & Roberts. This was not an acquisition of a distressed company, but a mutual decision with its previous owner, Skanska, that the sale would suit the future strategies of both companies. Skanska wanted to focus its core business on the northern hemisphere, while Murray & Roberts had recognised the need to globalise its underground mining business in order to maintain pace with the globalisation of its mining clients.

The Canadian assets of Cementation were acquired and the South African assets were merged with the existing Murray & Roberts RUC to become Murray & Roberts Cementation. The Group’s Australian market is served by RUC Mining Contractors.

Since the acquisition of Cementation in 2003, the resources sector has been on a prolonged bull run. Whereas the Group’s mining services division contributed R14 million to the bottom line in 2003, this year it has produced R233 million.

“This outstanding performance is the result of taking a small, focused South African company and turning it into the world’s largest underground services contractor,” explains Brian.

CLOUGH

The identification of oil & gas as a future growth market led to the acquisition of Clough, one of Australia’s largest multidisciplinary engineering and contracting groups. Its operations in global industry sectors such as onshore and offshore oil and gas, petrochemicals, minerals and infrastructure match the strategic aspirations of Murray & Roberts in those sectors and provide the Group with an operational presence in the eastern hemisphere.

Recognising the challenges inherent in the business, Murray & Roberts has managed the acquisition with caution, injecting capital and gaining control of the business incrementally. This year the 50% ownership level was achieved and Clough will for the first time be consolidated into the Murray & Roberts balance sheet.

Murray & Roberts has focused on assisting Clough with its challenge to return to appropriate levels of profitability.

“We’ve supported appointments that have given Clough more focus and we’re confident that within the next three years it will deliver on the value proposition we anticipated when first making the investment. I don’t believe we’ve overpaid for the business, and I don’t see any reversal of fortunes in the energy sector. The growing trend in this sector is to look seaward for new reserves, and that is exactly where Clough’s primary capability lies.”

Murray & Roberts has been highly successful in its project strike rate, because it has been selective and ensured it has the right people and capacity to deliver success.

CONCOR

Next, Murray & Roberts set its sights on Concor as an ideal candidate to expand the Group’s capacity in the domestic construction sector. The transaction was finalised with effect from June 2006 and Murray & Roberts embarked on a plan to position the business as a major player in the South African infrastructure sector.

This has the potential to be the best acquisition of all, says Brian: “By simply liberating the business by positioning it as a core business within our Group, this year alone we have seen a significant increase in performace – on no increase in revenue.”

That’s the magic of an appropriate acquisition and greater focus. An important decision was made not to merge the business with Murray & Roberts Construction as the two tend to serve different sectors and there was a sense that the effects of ‘liberating’ it might have been diluted by an inwardlooking process of consolidation with another business.

LATEST ACQUISITIONS

Murray & Roberts has also made a number of smaller acquisitions. Oconbrick was recognised as an opportunity to strengthen the Group’s existing capacity in the growing building materials sector, provided its capacity could be appropriately increased. The family owners agreed to sell 80% of the shares in the business with effect from September 2005. Since then, capacity has been increased by 20% and the business is performing to expectation.

In January this year, Murray & Roberts finalised the purchase of 80% of the shares in privately held Wade Walker. As with Oconbrick, the remaining 20% of the shares will be acquired from the current owners in terms of a performance contract covering the next three years. Wade Walker is a medium-sized Gautengbased electrical and instrumentation engineering contractor serving the South African and regional industrial and mining sectors. It will strengthen the Group’s existing MEI capacity.

The return on investment from acquisitions has been exceptional. In a fast-growing market, Brian believes one cannot be too conservative in pricing a business. Nonetheless, Murray & Roberts has a rigorous pricing process that requires its acquisitions to deliver a return on investment from the first year. The rigour of the process comes from the competence of its due diligence process, which identifies any problems within the target business.

MANAGING RISK

“I’d say we have one of the best processes in the industry,” says Brian, “and we will walk away from an opportunity that does not meet our strict criteria.”

Another success factor in the Murray & Roberts acquisition strategy has been the post-acquisition process. You cannot make an acquisition and ignore it, explains Brian: “You have to engage with it. It has to have an owner, not an investor.”

At the same time, new businesses are permitted to retain their identities while assimilating the core values of Murray & Roberts. If the due diligence is done properly, there will in any case be an alignment of values.

“Having successfully got this far, we cannot stop. There is too much happening in the world to stop half way, and we have the balance sheet for more acquisitions. We are not in a consolidation phase but a growth one. However, much of our intensity today is not so much on corporate acquisition as project acquisition, though this may switch again.”

PROJECT ACQUISITION

The Murray & Roberts project order book has grown exponentially in recent years. In 2004, it stood at R3 billion, last year it breached the R10 billion mark and today it has grown to R22 billion. While projects are not commonly perceived as an acquisition, Brian insists that the risk/reward character of projects should be emphasised due to the large amount of management time and investment that goes into them.

Murray & Roberts has been highly successful in its project strike rate because it has been selective and ensured it has the right people and capacity to deliver success.

So is the sky truly the limit, or are there any constraints to future growth inherent in the current Murray & Roberts structure? Brian says management is constantly evaluating all potential constraints. Leadership can become a liability, as can geography. The Group has stated its intention to remain a South African company, yet it was the move offshore which sparked the remarkable globalisation of companies such as Anglo American, Billiton and SA Breweries.

“We’re very conscious of our constraints in being South African domiciled,” says Brian. He sees the forging of global alliances and relationships as bridging this limitation, and a strategy suited to the construction industry.”

MURRAY & ROBERTS SHARE PRICE (SEPTEMBER 2006 TO AUGUST 2007)