Development giant Lendlease culls entire international operation
Multinational construction and development company Lendlease has been forced to make a hugely costly and equally embarrassing retreat from its international operations and initiate a hasty withdrawal to its Australian home base.
The contagion causing so many building companies to struggle is not limited to domestic construction’s woes, with international development titan Lendlease the latest to indicate it was slashing costs and entire operations in a quest to remain profitable.
The multinational construction and real estate company, headquartered in Barangaroo, Sydney, on Monday (27 May) outlined its highly anticipated investor strategy update and unveiled a torrent of new measures to rekindle the enterprise’s prospects.
Company Chair Michael Ullmer revealed the company will retreat from its hugely unsuccessful forays into the construction sectors in the US, UK and Europe.
The move by what has been identified as Australia’s largest construction company creates uncertainty around a litany of unfinished projects around the world, including Malaysia, China, the US, UK and Italy.
Lendlease’s ASX announcement issued Monday indicated that the company would simplify its organisational structure and right size its cost base; focus on its Australian business and international Investments platform; and, recycle $4.5 billion of capital by completing transactions announced and underway, exiting international construction and accelerating capital release from its offshore development projects and assets.
“We recognise that our security price performance and securityholder returns have been poor as we have faced structural challenges and a prolonged market downturn,” Mr Ullmar said in the announcement.
“We need to take significant action at an accelerated pace to deliver value for our securityholders, capital partners and customers.”
The company’s retreat to its home waters of Australia was emphasised in a statement from Lendlease Group Chief Executive Officer and Managing Director, Tony Lombardo.
“There is no question that the Australian business of Lendlease is market leading and unique in the breadth and strength of its integrated capability and services.
“Moreover, the opportunities to grow remain significant with a robust project pipeline that plays to our core competitive strengths, especially in urban regeneration.
“By reshaping the portfolio, concentrating on our core competencies in markets where we have proven we have the right to play, and the competitive advantage to win, the financial and operational risk profile will be lower, and we believe the quality of our earnings ultimately higher and more sustainable.
“We are exceptionally well placed to benefit from the key structural shifts underway in the economy.”
Construction giant’s challenging year ahead
The company is targeting $125 million in annual savings within 12 months, and the return of $500 million to shareholders through an on-market buyback.
Lendlease’s shares are still 21 per cent down year-to-date, with investors shying away from the company’s burgeoning international costs. It’s share price rose sharply on early news of the new cost-cutting measures.
Credit agencies were cautiously optimistic about the new direction.
Ian Chitterer, Vice President and Senior Credit Officer, Moody’s Ratings, indicated that next year or two would be paramount in determining the company’s success or failure.
“Lendlease has today announced further asset sales, cost reductions and the exiting of underperforming businesses, combined with intentions to reduce debt and targeted gearing levels.
“If executed as planned, these measures will be credit positive in the longer term, however, Lendlease’s credit quality over the next 12-18 months will still be heavily dependent on improving earnings, receiving proceeds from already announced transactions, and reducing debt levels.”
Shareholders critical of Lendlease
Internal concerns about the direction of the company were heightened last week when major shareholder Aware Super called for a managerial overhaul.
Scrutiny from several of Lendlease’s largest investors has been less than complimentary.
Tanarra Capital, which owns some 3.5 per cent, and South African-based investment management company Allan Gray, have called for wholesale change at the company, while investment firm HMC Capital has also said a restructure is needed.
The Financial Review quoted Tanarra Capital’s Chief Executive, John Wylie, as describing the international operations of Lendlease as a “disaster”.
The former Credit Suisse banker went on to say that the construction and real estate company had become, “unfocused and overextended with multiple, often-unrelated activities spread across four continents”.
Simon Mawhinney, Chief Investment Officer, Allan Gray, was reported in the media as telling his clients that Lendlease directors “are too arrogant by half, and they’re trying to take over the world, they’ve expanded into geographies in which they have no competitive advantage”.
“They’ve allocated $4 billion of shareholder capital to those geographies and collectively made zero for shareholders (and) that’s not a good outcome.”
Lendlease’s Mr Lombardo acknowledged the time had come for tough choices to be made. Significant staff cuts also appear inevitable.
“Our priority will be to pay down debt and efficiently return capital to securityholders.
“This is a profound change and is based upon making some very tough but necessary decisions.”
