A year of progress and achievement
Whatever the numbers may say about us, events and achievements around the business are just as telling. Construction of the immensely complex £550m Birmingham Hospital PPP project continued on budget and ahead of schedule. We are now engaged with 10 NHS Trusts in major projects critical to the task of improving public healthcare in the UK. British Energy chose Balfour Beatty for the care of all of its nuclear power facilities in an integrated package for the next seven years.
The Hong Kong Government entrusted us with the construction of its major new government complex; the US Navy with building over 5,000 new housing units at 11 bases in the south-east US; the US Department of Defense with building a major new technical centre; and National Grid with upgrading and developing the electricity transmission network across the whole eastern half of England.
We handed over the hugely complex rail station and systems work at Heathrow Terminal 5 to BAA on time; made substantial progress on the world's biggest shopping mall in Dubai; and steered the massive King's Cross Underground Station redevelopment project through another series of important cost and time deadlines.
We used our strong cash position to grow further the earning power of the business. We added a leading presence in the US building market, strengthened our regional building business in the UK, broadened the range of support services we offer and extended the range of technology we have available to service the rail market.
Of course, the year was not without its disappointments and the entry into administration of Metronet, in which we had a 20% interest, was first amongst them. We have worked closely with London Underground and the PPP Administrator to ensure that the daily operations of the Tube have been unaffected. We remain committed to the creation of a world-class underground system for London and will continue to provide a range of services under the new arrangements which have been put in place.
The Chairman
Sir David John is to step down as Balfour Beatty Chairman at this year's AGM after five years in post. In that period, our revenues and earnings have doubled. Our share price at the time he became Chairman was 187p. He is owed a great debt of thanks by the Company for his untiring work as Chairman and I would like to offer my own personal thanks for his guidance and advice since I became Chief Executive at the beginning of 2005.
Ian Tyler
Chief Executive
Our strategy
Our goal at Balfour Beatty is to deliver consistent, long-term value growth to our shareholders. We will do this by striving to become the leading provider of high-quality, customer critical infrastructure in each of our chosen markets. By becoming the partner of choice to sophisticated owners in our chosen disciplines and geographies, we believe we will achieve secure, industry best margins in our contracting activities and substantial, sustainable equity returns from our long-term investment portfolio.
Our core skills are anchored in our engineering expertise. We enjoy an enormous depth of experience and capability in the conception, creation and care of infrastructure assets. The markets which we serve, with few exceptions, are national or sub-national. We therefore seek market leadership, which affords optimum access to customers, suppliers and talent, in a small number of specific geographic territories.
Our strategy is to grow both organically and by acquisition in disciplines within or adjacent to our established core skills in our principal geographic markets. In the short term this will be true, particularly in the UK and the US. We will, in due course, also develop major regional businesses from strong existing bases in South-East Asia, the Gulf Region and Western Europe.
Our chosen markets are almost all experiencing steady growth, with several advancing more quickly. Within these markets, we have long-term relationships with strong, sophisticated, successful customers who are committed to major long-term infrastructure investments.
Our very substantial order book and the investment plans of our long-term customer base give us excellent visibility of our workload for the next two to three years and a high level of confidence in our ability to continue to grow strongly over this period.
Our business, as currently constituted, also has excellent longer term prospects arising from, for example, the London Olympics, the planned nuclear programme, Crossrail and continuing investment in education and healthcare in the UK and heavy public, particularly military, spending in the US.
Two years ago, we identified four principal areas in which to invest, which would further underpin and promote growth in the medium and longer term. Since that time, we have made excellent progress in the four areas, which are: extending our UK regional coverage in building and civil engineering; developing a major capability in professional and technical services; taking our private finance skills beyond the UK PPP market; and establishing strong, multi-disciplinary domestic businesses outside the UK, particularly in the US.
UK infrastructure
Traditionally, our coverage has been strongest in Scotland and parts of the north of England with a lesser presence in the Midlands, the south and in Wales. In 2003, we took a major step forward with the acquisition of Mansell, a quality building construction and refurbishment business, widely spread across the UK’s regions, which provided a strong presence, with high-quality customers in both the public and private sectors.
At the time of acquisition in December 2003, Mansell had annual revenues of a little over £500m. Under Balfour Beatty management, Mansell will have grown its revenues to approximately £850m in 2007 and more than doubled its operating profits.
In mid 2006, we acquired Birse, a civil engineering company, particularly strong in the north of England and the Midlands, with skills in the coastal, rail and process sectors additional to those already in the Balfour Beatty Group. The business was quickly and successfully integrated into Balfour Beatty Civil Engineering, while retaining its own market identity, and has accelerated the Group’s continuing growth in regional engineering markets.
In August 2007, we continued the expansion of our regional businesses with the acquisition of Cowlin, a high-quality building and refurbishment contractor based in Bristol, which provides a strong, established presence in the south and south-west of England and in Wales. The business has regional offices in Bristol, Cardiff and Plymouth and employs approximately 500 people.
Cowlin, which has become part of Balfour Beatty Construction, is particularly strong in the healthcare, education, property and leisure markets. It is a well-respected brand with a quality reputation, a large secured order book and an experienced management team. Through the acquisition, Balfour Beatty has become a top-tier player in Wales, and the south and south-west of England.
Strategic developments
Professional and technical services
Balfour Beatty Management continues to be one of the UK’s fastest growing consultancies. Formed in 2003, it now has over 500 professional staff. In 2007 it grew organically and, in order to broaden the scope and coverage of its operations, through acquisition. Two commercial services companies were acquired in the year, one specialising in commercial developments, principally in London, and the other serving the industrial sector from a base in the north-east of England.
Balfour Beatty Management is now an integral part of the Group’s major UK customer relationships and of its complex project bids. It leads and co-ordinates a variety of the Group’s major activities including the £550m overhead electricity alliance for the east of England for National Grid; the £350m integrated facilities management and maintenance programme for British Energy; and the Group’s role as complex build integrator for BAA’s programme to develop its major airports. It was responsible for all aspects of the final commissioning of Balfour Beatty’s work at Heathrow Terminal 5 and is the major force for the development and operation of Exeter International Airport. It has led the bidding process for the Group’s submissions for the 2012 London Olympics Aquatic Centre and the M25 PPP concession project.
It has also developed a substantial business base in its own right. For the Department of Transport, it has managed the timely delivery of the first phase of the new King’s Cross Underground Station and is now co-ordinating the second phase due to be delivered by the end of 2009. It is also managing the Victoria Line upgrade. It is working on major commercial developments in London and Glasgow, including the transformation of Chelsea Barracks for private residential use. The company is now targeting the UK industrial and energy sectors.
Balfour Beatty’s professional and technical services expertise in the US is provided by Heery International. Active in the national building market, Heery too is growing through a mixture of organic development and acquisition.
Strategic developments
Private finance
Currently, the UK PPP market shows no sign of slowing and Balfour Beatty Capital is bidding for a further six new projects, potentially to add to the 27 UK PPP concessions which have already been secured. In education, the Building Schools for the Future (BSF) programme has provided a substantial new market. In healthcare, investment of the peace dividend in Northern Ireland is creating major opportunities and while the mega-hospital market may now be over, there remains a range of smaller, but still substantial, projects in the pipeline.
In transportation major arterial road widening projects will provide the next major investment programme, while PPP remains an option for realising the objectives of the Government’s major expenditure programme in the affordable housing sector.
Balfour Beatty became an investor in non-PPP infrastructure in the early 1990s when it took a 25.5% share of Barking Power, an interest which it still retains. In early 2007 it completed the acquisition of Exeter International Airport and has since explored a number of other opportunities in the airport and utility sectors. The extension of our investment business into international markets is being undertaken through two routes. Expert teams have been established in the US, Germany and South-East Asia to identify, develop, bid and execute projects in those territories. In November 2007, we achieved our first success when we were named as preferred bidder for the £90m Institute of Technical Education in Singapore (ITE).
In February 2008, we announced an agreement to acquire GMH Military Housing in the US. GMH is a leader in its market, with a portfolio of 15 concessions covering over 30,000 units of family status accommodation on 42 military bases across the US. The acquisition, which is expected to be completed in the second quarter of this year, will, in addition to enhancing Group earnings, add an experienced and successful management team to the task of developing our presence in the growing US PPP market.
Strategic developments
International markets
When we entered 2007, our US business presence comprised separate businesses in professional and technical services in the national building sector, in civil engineering work principally in Texas and California, and in multi-disciplinary rail contracting.
During 2007 and the early part of 2008, we made two important moves to build on this base. In March 2007, we completed the acquisition of Balfour Beatty Construction US (formerly Centex Construction). The company is a top-tier building construction and construction management business, well placed in a number of growth markets, with a proven and committed management team, and processes and culture which are highly compatible with those of Balfour Beatty.
Balfour Beatty Construction US, with annual revenues of over $2bn, undertakes the construction management and delivery of institutional and commercial buildings in the education, healthcare, correctional, government, transportation, leisure and office sectors. Amongst its major customers are Federal Government, Disney Corporation, Boston Properties, Marriott and Bank of America.
In the period since its acquisition, Balfour Beatty Construction US has performed ahead of our expectations and represents a first-class asset from which to grow both in its own markets but also through geographic expansion and, in combination with our other US businesses, in new markets.
In February 2008, we reached agreement to acquire, subject to regulatory and other consents, GMH Military Housing, which develops, renovates, finances, operates and manages military housing projects on lines similar to the UK PPP model. Balfour Beatty Construction US acts as its construction partner.
In time we anticipate that our US business will be comparable, in size, to our UK business.
Our ability to continue and even accelerate the on-going development of our business is not limited by opportunity, but by the resources needed to assess, invest and acquire with the same qualities of successful discrimination and integration as has so far been achieved. We are a naturally attractive home for quality business in our areas of core competence and expect to develop the business further in 2008.
Strategic developments
