Hochtief AG (HOT) forced out the top two executives at Leighton Holdings Ltd. (LEI) and put its Chief Executive Officer Marcelino Fernandez Verdes in charge, as it raised an offer to increase its stake in the Australian builder.
Hamish Tyrwhitt, Leighton’s CEO since 2011, and Chief Financial Officer Peter Gregg had their employment terminated and resigned from the board, the Sydney-based company said in a regulatory statement. Hochtief, which is seeking to boost its majority holding in Australia’s biggest construction company to as much as 74 percent, said it would pay minority shareholders A$22.50 per share, up from A$22.15 three days ago.
The moves will increase Hochtief’s influence over a business that accounts for about 62 percent of its pretax profits, at a time when the German company’s group earnings are forecast to decline 18 percent this year. Fernandez Verdes, who’ll be Leighton’s third chief executive since Wal King ended a 23-year term in December 2010, has already been named as the next chairman of Actividades de Construccion & Servicios SA or ACS, the Spanish builder that in turn controls Hochtief.
“It’s pretty clear who’s in control now,” Heath Andrews, an analyst at Royal Bank of Canada in Melbourne, said by phone. “If you’re a retail shareholder my advice would be to sell your entire holding on-market immediately.”
Leighton shares fell 1.5 percent to A$21.90 in Sydney, paring this year’s gains to 36 percent. The benchmark S&P/ASX 200 Index has risen 1.1 percent this year. Hochtief gained 0.6 percent to 68.32 euros in Frankfurt as of 9:07 a.m.
“Whenever you have massive board and management changes there is operational risk,” Stephen Mayne, a spokesman for the Australian Shareholders Association, said by phone. “It is a question of whether Leighton’s formula will be destabilized.”
The Australian business, which mines coal for BHP Billiton Plc, is building a casino hotel in Macau for Wynn Resorts Ltd. and is constructing parts of a natural gas export terminal for a venture operated by ConocoPhillips and Origin Energy Ltd.
Since taking the helm of Hochtief in November 2012 after eight years heading up ACS’s Dragados SA unit, Fernandez Verdes has focused the German company on its main building business and reversed a decade-long shift into services.
His appointment was the culmination of an acrimonious takeover battle that claimed the jobs of two Hochtief chief executives and left ACS with about 56 percent of the German company.
Fernandez Verdes said he’ll now divide his time between Hochtief’s headquarters in Essen and Australia, and hasn’t got a timetable for how long he’ll stay in the job or when he’ll become ACS chairman.
“I don’t know what’s going on in the future but today my commitment is to stay here,” he told a media call today from Sydney. “I’m going to be focused on that, without having any date or any deadline ahead of me.”
The process of firing Tyrwhitt and Gregg was “gut wrenching,” Chairman Bob Humphris said on the call.
“I’ve been in tears today,” he said.
Standard & Poor’s and Moody’s Investors Service have both flagged the risk of ratings downgrades if Hochtief, currently with a 59 percent holding, increases its stake in the Australian company.
ACS and Hochtief have weaker credit than Leighton, Moody’s senior analyst Maurice O’Connell wrote in a March 10 note putting its ratings on review for a downgrade.
“Leighton’s strategic direction and financial policies could be driven by Grupo ACS or Hochtief, which could materially heighten the risk profile of Leighton’s operations,” if the Australian company ends up being treated as a subsidiary of ACS, Craig Parker, a credit analyst with S&P in Melbourne, wrote in a March 11 opinion putting its rating on a negative watch.
Fernandez Verdes will work to align Leighton with its parents in the months ahead for the good of the group, he told the media call. Leighton’s “balance sheet is influencing not just Hochtief but ACS too,” he said. “The more you can improve Leighton, the better for Hochtief and for ACS too.”
Lifting Hochtief’s stake to 75 percent could trigger change-of-control provisions for Leighton’s debt facilities, Brent Walsh, a Melbourne-based analyst at Bank of America Corp.’s Merrill Lynch unit, wrote in a March 10 note to clients.
“We view this as a key reason for Hochtief only seeking to raise its interest to 74 percent,” he wrote.
Hochtief declined to make a full takeover offer after being pressed to do so by independent directors on Leighton’s board, the Australian company said.
“Whilst we pressed hard we didn’t press for very long,” Humphris said on the call. “It was quite clear that was not a possibility.”
Leighton’s new board will consist of Fernandez Verdes, four Hochtief nominees and five independent directors, according to the statement. Humphris will remain as chairman.
Hochtief, which has been a shareholder since 1981, has been gradually increasing its stake in Leighton since last June, under creep provisions of Australian listing rules that allow large shareholders to add 3 percent to their holdings every six months.
Pretax profit at the German company will drop 18 percent to about 655 million euros ($911 million) in the year ending December, according to the average of 14 analyst estimates compiled by Bloomberg.
Asked why Tyrwhitt and Gregg were fired, Humphris said the changes would have been sought by Hochtief at the company’s annual shareholder meeting in May anyway. Making the appointments enabled Leighton shareholders to get a higher price in Hochtief’s stake build, he said.
“They made it quite clear they were doing this,” he said. “Marcelino is a very tough man to negotiate with.”
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