Tunnel delay hits Lendlease sale

The bitter dispute over the Melbourne Metro tunnel project could hit the sale of Lendlease’s under-pressure engineering unit.

Lendlease chief executive Steve McCann. Picture: Britta Campion

The bitter dispute over the Melbourne Metro tunnel project could hit the sale of Lendlease’s under-pressure engineering unit, with the Andrews government signalling it would take a hard line in negotiations about cost blowouts and delays.

The Cross Yarra Partnership consortium, comprising Lendlease, Bouygues Construction, John Holland and Capella Capital stopped work on the $11bn project on Monday

But the move was dismissed by the Victorian government as a tactical ploy.

Victorian premier Daniel Andrews rejected the move by the heavyweight consortium, saying the government expected its contract to be honoured after digging halted on the twin 9km tunnels on Monday.

The situation is finally balanced with the listed Lendlease advancing plans to offload its engineering division. The dispute points to the fraught nature of infrastructure projects despite a hefty pipeline planned around Australia.

Boutique investment bank Flagstaff Partners has already been tapped as a mediator and there have been reports the consortium could seek up to $3bn.

Delays in resolving the dispute could push back the timing of the engineering unit’s sale but Lendlease has stuck by cost estimates given at last month’s annual meeting when it said talks were advancing.

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The sales process for the Lendlease engineering and services division began earlier this year, with advisers Gresham and Morgan Stanley handling the process after a strategy review by Goldman Sachs. The favourite potential buyer, Spain’s Acciona, has been reported to have stringent conditions for taking on the engineering business.

Chinese-backed John Holland is after the Lendlease services operation but may also come under scrutiny in the tunnels dispute.

The concerns have rattled investors, amid fears there may be higher costs than the $450m-$550m Lendlease had forecast it would cost to exit its engineering business.

Lendlease shares dropped 2.4 per cent on Tuesday, to $18.28, after touching a low of $17.97. It followed a fall of 1.5 per cent on Monday.

“The project could impact a sale of engineering and result in an impairment — and as the reported services buyer is John Holland, a Cross Yarra Partnership consortium partner, it is possible the services transaction could also be impacted,” JPMorgan analysts said. The analysts said the reported work stoppage of the two tunnel boring machines increased the risk around the transaction.

Melbourne Metro is the company’s largest and most dated engineering project.

“We believe Lendlease is close to effecting a sale of the E&S business and the stoppage has a number of potential implications. The most likely is that the sale concludes albeit with a contingent liability for Lendlease,” JPMorgan said.

There have been reports suggesting the consortium is seeking an additional $200m-$300m, which would be equivalent to 4-5 per cent of the $5.3bn project revenue and Lendlease’s share would be $65m-$100m.

“This would be broadly consistent with the [Victorian] Auditor-General’s report in June, in our view,” JPMorgan said.

The June ­report found early works for the $11bn twin tunnels — which will run 9km under the CBD ­between Kensington and South Yarra — were already $150m over budget.

Just three weeks ago Lendlease, which is facing class actions over its initial disclosure of problems in its engineering business last year, reaffirmed its flagged restructure cost of $450-$550m pre-tax, which included portfolio level indemnities.