Aveng struggles for survival
With the M&R merger offer off the table, debt-laden Aveng is scrambling to keep going
Is Aveng, which just a decade ago was SA’s biggest construction company, nearing the end of the road?
Already, the crunch in infrastructure spending has claimed a number of construction scalps — the most prominent of them Basil Read, which tipped into business rescue in June.
Aveng has been surviving on fumes until now: for the six months to December last year, it made a bottom-line loss of R346m. And with debt of R3.25bn, it can only be a matter of time before its bankers start demanding a greater say in any revival plan.
Already, certain debt-to-equity covenants may have been breached, as Aveng’s shares have fallen 98% in the past year to just 6c. It’s a far cry from the heady days of 2007 when contracts to build World Cup stadiums were rolling in, and its share price was R71.
So can it survive? And if it does, will it be worth investing in?
"They must find cash," says analyst Wayne McCurrie of FNB Wealth & Investments.
"They can go for a rights issue at a huge discount. That will be a forced rights offer, out of desperation. In its current state, the economy cannot save Aveng."
There was, of course, one ray of hope for Aveng — but it has been brutally extinguished in recent days. On May 18, rival Murray & Roberts (M&R) tabled an offer to buy Aveng for about R1bn (provided it raised R300m).
Many believed this to be just a frustrating mechanism, as German construction group Aton had mounted a hostile takeover of M&R. Had M&R bought Aveng, it would have helped it thwart the takeover.
In the end, Aton outflanked M&R, buying 25.4% of Aveng — just enough to block the merger from getting 75% of shareholders to approve it. M&R threw in the towel, saying there was "limited potential" for the deal to go through. As a consequence, Aveng’s stock sank like a stone.
Still, while the merger may be dead, there was never a compelling rationale behind it, other than the anti-Aton strategy. "Consolidation is a good thing but in this case, there were other reasons behind the move," says McCurrie.
Aveng investor relations executive Michael Canterbury tells the FM Aveng has plans to reduce its debt to a sustainable level to strengthen its balance sheet. Key to this, he says, is paying off R2bn in convertible bonds, which are meant to mature next July but which Aveng hopes to redeem sooner. "[We] have also made good progress in terms of restructuring the balance sheet, with R493m in new capital raised recently in a rights issue.
"Completing the early bond redemption will be a big step forward in the strategic action plan," he says.
Aveng CEO Eric Diack wants to sell its construction arm, Aveng Grinaker LTA, and its steel arm, Aveng Trident Steel. This would leave it with only the McConnell Dowell business in Australia and the Moolmans mining contracting business, which together have a net asset value of R3.6bn.
This is easier said than done, however — Aveng has not been able to find buyers for Grinaker LTA or Trident Steel.
On this point, Canterbury says only that Aveng’s board has "decided to accelerate this process as far as possible, without unduly [affecting] the value that can be realised", and that "discussions are advancing on those assets".
But if selling the two divisions has proven difficult so far, why would that change any time soon?
Canterbury provides no further insight — has a buyer been found, for example? The lack of clarity means analysts and potential investors are unsure of the company’s prospects.
After Aveng’s full-year results in March, SBG Securities published a research report in which it said putting a value on Aveng "remains precarious". It noted "several execution risks on the asset disposal programme and the effect of … problematic contracts".
Marc Ter Mors, an analyst at SBG Securities, tells the FM that Aveng’s fate hinges on its efforts to buy back the convertible bonds and cut its debt load.
"It is difficult to gauge to what extent there will be value after the transaction. We have Aveng under review because we are still waiting for the balance sheet to be capitalised. It could be attractive after the bond buyback. We will wait and see how the balance sheet is restored," he says.
Part of the problem with supporting Aveng through its current trouble is that prospects look dim in the construction and mining sector. "There is just no work at the moment," says McCurrie.
David Metelerkamp, a senior economist for consultancy Industry Insight, says the failed merger with M&R is a blow for both companies. He says it takes time and money to launch in a new country, and Aveng would have got access to M&R’s network in Australasia, the Pacific region and the Middle East.
Having to stay put doesn’t help, especially as SA has had the biggest cut in government infrastructure spending since the late 1990s.
"The growth of the economy has also been extremely poor, and has been considerably worse than expected this year — the slowdown in general demand-drivers has filtered through to the construction sector," Metelerkamp says.
If anything, he says, conditions in the civil engineering sector are likely to get worse over the next year. But thereafter they should improve because the government would at some stage have to begin spending to spur the economy. "We expect more efficient state-owned entities [SOEs] with Pravin Gordhan at the helm [of the department of public enterprises]," he says. This is critical as building activity is largely driven by SOEs. Once they have been sorted out, the taps should open.
Though the big companies in the sector have suffered, small-and medium-size contractors have fared much better over the past few years.
"This is due to a higher number of smaller projects becoming available, as well as government breaking bigger projects up into smaller pieces for transformation purposes, as well as a loss of trust in the bigger contractors," says Metelerkamp
Not that this helps Aveng at this point. With the M&R merger off the table, it’s in a battle to trim its debt just to survive a brutal market.
Only the bravest investors would be considering a punt right now.