Is demerger on Lendlease’s horizon?

Lendlease reported a $136m loss for the six months to December.

The future of Lendlease continues to be a point of fascination in the market, as the company maintains there’s nothing more to see in terms of major change to its construction arm.

The general view is that appetite for an acquisition of the construction division has likely been tested in the past, but such businesses are extremely difficult to sell, particularly when it comes to another party taking on project risk.

Yet a second option could be a demerger.

That’s the chatter around the market as to what Macquarie Capital could be up to, in terms of providing some sort of solution around a simplification of the business.

Yet talk to those on the Lendlease side and this option gets played down, despite the best efforts from investment banks to pitch the idea.

The problem Lendlease has with a demerger is that sources say it would need to add about $1bn of capital to the business – which would probably require an equity raising.

This is at a time that it has high debt levels ($3.7bn of net debt) and is struggling to sell assets at the right price to deleverage the business.

Then there is that the construction arm compliments property development, and any further writedowns to its overseas construction business would complicate matters.

It would also duplicate overheads with another management team and listing costs.

Yet many in the market believe the company needs to announce something big when it delivers its market update in May, and a number believe the demerger option is being assessed.

The industry talk is that internally, the company is considering all of its options.

Shares fell sharply this month when Lendlease reported its results.

Concerns have been building for some time surrounding the performance of Lendlease, operating globally in a tough economy.

Macquarie Capital worked with Lendlease to sell the property group’s masterplanned communities business to Stockland and Supalai last year for almost $1.1bn, but the understanding is that the bank is also assisting the company in other ways.

Macquarie could be weighing options for other asset sales such as the share it owns in Retirement Villages, formerly known as Lendlease Retirement, or assets offshore.

The company has told the market it was exiting some parts of the US construction market, including Central America and California.

Market experts say Lendlease is one of the hardest in the real estate sector to run because of its global reach and complexity, while some shareholders have called for the business structure to be simplified and a retreat back to Australia.

But the verdict among market participants is that the business is not easily broken up.

Apparently, Lendlease hired investment bankers to work on a possible demerger of its construction unit around 2015.

That was under the leadership of former boss Steve McCann.

However, the understanding is that the company opted against the move.

Lendlease reported a $136m loss for the six months to December, down 4 per cent on the previous corresponding period, as property values fell and global real estate capital market conditions were difficult.