Balfour Beatty
Tyler says Centex project risk is limited.

Centex Corp. had been shopping its commercial construction unit to prospective buyers for some time but started moving toward a decision in the last several months. The company wanted to concentrate on homebuilding, where even though sales have slowed recently the profit margins are 10% to 15%.

“We’ve been hearing about them having discussions,” says Hugh Rice, chairman of consultant FMI. Compared to homebuilding, the profit of Centex’s commercial and government construction unit “tends to be lower. It’s a huge volume, just lower traditionally, so it has a depressing effect” on Centex’s share price, says Rice.

Balfour Beatty, the London-based contractor and engineer, announced today that it has agreed to pay $362 million in cash for the unit. Because the Centex unit has $200 million in working capital in the form of cash, you could interpret Balfour Beatty’s payout as only $162 million, according to discussions at a London press conference between analysts and Balfour Beatty CEO Ian Tyler. Based on that logic Balfour Beatty is paying roughly 4.6 times the unit’s earnings before taxes and depreciation. With Balfour Beatty’s shares trading on the London exchange at about 9.7 times its earnings, Balfour Beatty may have made as one analyst put it “a ripping good deal.”

The deal certainly makes sense to Balfour Beatty in a number of ways, says Tyler. While Balfour Beatty continues to expand its operations in England, eventually the prospects for growth in that country are limited, he says. And Balfour Beatty had the cash—and some left over for more deals if needed.

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    The Centex deal, which is expected to close in March, puts Balfour Beatty on a different footing in the U.S. It already owns Heery International, an “upstream” operation in Tyler’s words that designs but is also a construction and program manager and works in California. Balfour Beatty also performs transportation and heavy and railroad construction in this country. But with Centex Construction Balfour Beatty gets a large, sophisticated, tightly focused construction manager that sticks mainly to Washington, D.C., Texas, North Carolina and Florida, it’s biggest market. The 1,400 employees all are remaining as is the Centex incentive system for project managers, says Tyler. Centex Construction CEO Robert Van Cleave and the unit's four divisional presidents are also remaining.

    The headquarters will remain in Dallas, says a Centex Construction spokeswoman. "They are buying us lock, stock and barrel," she says.

    Balfour Beatty now will have $3.5 billion in annual revenue, says Tyler.

    Centex Construction in 2005 had operating profits of $26.8 million on revenue of $1.6 billion, but the unit in the first nine months of 2006 was ahead of those marks.

    Tim Eller, Centex Corp.'s CEO, said in a statement, “The sale further simplifies our portfolio and supports our strategy of focusing on our core homebuilding operations. Centex Construction’s already strong operations will benefit significantly by being part of a company focused entirely on the commercial construction sector.”

    The word commercial in this case is a little misleading because a solid portion of Centex’s work is military family housing construction, of which Centex and its partners have won nine separate projects, some still in their early phases. Centex Construction has in fact many private-sector clients, including many in health care and education, and has moved away from bidding and self-performed work.

    Centex has limited its construction unit’s revenue growth to be sure it negotiates most of its contracts and limits risks, says Tyler. With the unit comes a profit margin of about 2%. “The revenue chart shows quite a deliberate suppression of the top line in favor of good profit growth,” says Tyler. That profit margin carries a lower risk and is “more sustainable” than higher profits on “our construction business in the U.K.”

    Robert Moss, the former CEO of Centex-Rooney Construction Co. Inc., Ft. Lauderdale, has been credited by industry sources with being a key figure in building up Centex’ robust construction business. He left the company in 2003 and has said he wanted to take a break from the corporate world and negotiated an 18-month non-compete pact. His new company, Moss & Associates, Ft. Lauderdale, has been prospering.