Development giant Lendlease selling engineering business to Spanish conglomerate Acciona

Analysts see ‘problem projects’ holding up any deal as Lendlease wrestles with cost blowouts in Melbourne.

Melbourne’s Metro Tunnel project. Picture: David Caird

Global construction and development giant Lendlease has been stuck with a heavy exposure to the troubled $11 billion Melbourne Metro Tunnel Project as it offloaded the bulk of its engineering unit to Spanish conglomerate Acciona.

Lendlease will receive just $180m for selling the business that led to a shock write down in November 2018 that wiped more than $2bn off the company’s market value and blighted the tenure of veteran chief executive Steve McCann.

The company’s share price has since recovered as it has built up a $100bn pipeline of projects around the world but Mr McMann on Thursday admitted the company was stuck in talks with the Victorian government about the problematic Melbourne tunnelling project.

Lendlease has a 33 per cent interest in the consortium building the tunnel, along with John Holland and Bouygues Construction.

Lendlease’s sale to Acciona was flagged by The Australian’s Data Room column but investors could punish it for failing to fully lance the problematic business.

But the company has insisted that its exit will be within its initial estimate of an exit cost of $450-$500m despite more gloomy market projections.

Mr McCann said the Melbourne metro project had started more slowly than anticipated and there had been issues relating to its cost and scope.

He said the consortium had been working with the Victorian government on a confidential basis to “resolve” these issues while delivering it to achieve planned completion dates.

He told investors that Acciona could in future buy into the project but the Spanish company flagged it was more interested the eight assets it now buying.

Lendlease and its partners have been wrestling with cost blowouts predicted to be in the order of $2bn on the Melbourne Metro Tunnel Project.

Work stopped this month but resumed after the tactic drew a fierce response from the Andrews government that has flagged it will take a hard line in negotiations.

Lendlease last year took a $500m hit on three roadworks projects but still drew interest in its engineering unit on the back of the nationwide infrastructure boom.

It was slammed by writedowns on Gateway Upgrade North and Kingsford Smith Drive highway widening projects in Brisbane, and the NorthConnex M1/M2 9km tunnel project in Sydney.

In addition to the Melbourne Metro, the company will keep the NorthConnex and Kingsford Smith Drive projects that are both in their final stages.

Investors are concerned about the lack of a clean exit from engineering but the deal was announced after the market closed.

“The deal is worse than what the market was expecting because it lacks certainty. The market was expecting a larger indemnity but capped downside. The current deal excludes Melbourne Metro, so the downside is not capped,” CLSA analyst James Druce said.

Mr Druce had assumed a net total cost to exit engineering and services of $1.5bn against an estimate of $1bn priced in by the market.

Acciona will buy eight key projects from Lendlease in a deal that also includes the project-related workforce and Lendlease engineering’s business development teams.

The price is one third payable upon completion, a further third at the end of 2020, and the rest in June 2021.

Earlier, Italy’s Salini Impregilo was in talks to buy the engineering arm but withdrew from the competition.

Lendlease marketed its engineering and services operations through investment bank Morgan Stanley and boutique adviser Gresham.

The price is a fraction of the $1.055bn price Lendlease paid for Bilfinger Berger’s Australian construction business Valemus a decade ago although Lendlease is still selling the services business. That process proceeding with the Chinese-owned John Holland said to be closing in.

But the Spanish group will look to turn around the beleaguered engineering division by combining it with own operations to make it into a major player in Australia’s infrastructure market.

Work levels have surged on the back of government spending in most states but contractors have found it hard to make profits with state governments cracking down cost overruns and unrealistic projections.

Tender processes have also been marked by volatility with Lendlease not proceeding with Sydney stadium tender that later was picked up by John Holland but at a higher cost.

For Acciona it is a chance to pick up the top class platform but for Lendlease problems may linger as it faces class actions relating to its disclosure of its 2018 problems.