License article

How Leighton was lost

When Leighton Holdings chairman Bob Humphris was summonsed to Sydney's Four Seasons Hotel last Sunday he knew something big was brewing.

He'd been called to meet Marcelino Fernandez Verdes, the boss of Spanish-owned infrastructure company Hochtief, Leighton's biggest shareholder and the company that had long harboured plans to boost its holding in the Australian builder.

Verdes rarely made impromptu visits to Australia. So when the call came to meet him in one of the hotel's boardrooms on the 32nd floor, Humphris made his own calls to try to figure out what had brought the Spanish Armada back to town - urgently. He didn't know it, but by the end of the week Leighton - along with subsidiaries such as Thiess and John Holland - would be effectively in Spanish hands, with three of its directors out the door along with its chief executive, Hamish Tyrwhitt, and chief financial officer, Peter Gregg.

The fast-paced Verdes, who, some say, tosses back cans of Red Bull for breakfast, had made some mutterings at a dinner in Sydney's The Rocks weeks earlier that Hochtief wanted to increase its stake in Leighton.

In some ways the relationship between Leighton, Hochtief and Spain's Grupo ACS can be likened to Tolkien's Lord of the Rings, which is about a quest to conquer Middle Earth by controlling one ring that rules the other rings of power.

Leighton is controlled by Hochtief, a German company, which in turn is controlled by ACS - a Spanish contracting giant with operations in five continents. But Leighton is the prize asset of the bunch - it contributes more than 90 per cent of Hochtief's earnings and 40 per cent of ACS' group earnings.


For years, Hochtief and Leighton had operated under a "gentlemen's agreement" that the German group would not buy more than 55 per cent of the Australian contractor. When, last July, Hochtief officially breached this agreement, it was game on.

Between then and now it has increased its stake in Leighton from 54 per cent to 59 per cent, using Australia's creeping acquisition rules to put it in a better situation to become the master of the rings - which, for Leighton, means integrating it into a worldwide construction giant.

In the past few months Hochtief's plans for Leighton accelerated. Although Leighton is the jewel in the global empire, it had ne off the rails in the past three years - in the wake of the departure of former chief executive Wal King - and its turnaround was taking too long.

As one executive at Leighton said: "The Spaniards want to make it [Leighton] more profitable than it is and they have plans to do that."

The executive, who asked not to be named, said Verdes "wants to get to the end game quicker and that means more brutally than Gregg and Tyrwhitt were doing - and that means a brutal restructure."

Well placed sources said this could include sales of assets including construction company John Holland, which could fetch up to $1 billion, the sale of its property business, the sale of its aviation assets, the sale of its stakes in listed companies Devine and Macmahon Holdings, the culling of some brands (for instance it owns Silcar and Vision Stream) to make it less confusing and to streamline bid costs.

Leighton spends up to $500 million a year on making bids for contracts - more than 10 per cent of the group's current work in hand.

This ''brutal restructure'' could mean cuts to head office and across the Leighton empire, the sale of equity stakes in toll roads in Indonesia, its investment in AquaSure and putting more assets into its asset management business to take some of the risks off the balance sheet. It could also mean a modernisation of the Leighton structure, which currently has multiple offices in each state and multiple outposts in countries around the world, which are costly and inefficient.

Then there is the issue of the company's $5 billion-plus account receivables (money owed to it for work done) which continue to blow out and which it has been desperately trying to claw back.

Tackling these could result in some big write-downs. As a former senior executive said: ''some of the underclaims in the Middle East have been hanging around for years and need to be dealt with''.

At the centre of the decision by Verdes to move on Leighton was the decision by long-time ACS head Florentino Perez to retire and anoint Verdes as his heir apparent.

Verdes, 58, was transferred from ACS to Hochtief in April 2012, initially as chief operating officer.

In November that year he was appointed chairman and chief executive of Hochtief and has been living in Essen, Germany, ever since, while his family remains in Spain and the weekly football games with his childhood friends continue without him.

Verdes went through Hochtief like a dose of salts, changing the board, senior management and selling numerous assets. The result: Hochtief shares soared from €30 to €67.

Perez - who is also the president of famed Spanish football club Real Madrid - hasn't given a timeline for his retirement, but the speculation is that he will depart after the group's annual meeting next year.

That means Verdes has a list of things he needs to get done at Hochtief and Leighton before Perez hands over control to his heir and Verdes can go home to Spain.

It was the succession plans at ACS that resulted in the endgame being accelerated. Theories abound, but the most plausible is that the four powerbrokers at ACS hatched a plan to seize control of Leighton, swiftly and surgically.

One source says a war room was created in another part of the world to move carefully and in an orchestrated manner without the knowledge of Leighton executives or independent directors.

The arrival of Aldolfo Valderas Martinez last December as Leighton's new chief operating officer and head strategist, was part of the plan. It was the first time a Spaniard and ACS executive had been given such a role at Leighton.

Martinez is one of the most powerful executives in the global empire of ACS. His appointment was supported by Tyrwhitt but the sense of anxiety at Leighton's head office in Sydney about what it all meant had become palpable.

The next step in the ACS plan was securing control of Hochtief. It launched what is effectively a share buyback, which automatically increased ACS' stake in the German construction company to 55 per cent.

The next window of opportunity was ahead of the release of Leighton's annual general meeting resolutions which were due to be posted to shareholders this week.

It was to include resolutions to re-elect three directors Paula Dwyer, Russell Higgins and Vikki McFadden and chief financial officer Peter Gregg, who was also on the board.

Verdes packed a suit and jumped on a plane to Sydney for the next stage of the mission - to replace the Australian directors on the annual meeting resolutions with two ACS nominees. He arrived in Sydney on Saturday night, and promptly set up the Sunday meeting with Humphris.

Humphris went to the meeting with a sense of trepidation given Hochtief had a long pattern of making significant announcements just before resolutions were sent to shareholders for upcoming annual meetings.

It was almost a year to the day since three other independent directors had quit the board due to a disagreement with ACS.

The Sunday meeting between Verdes and Humphris was short and sharp: Hochtief would make an unsolicited offer to minority shareholders to get to 74 per cent and a proportional board presence. What it also meant, but wasn't clear to Humphris on the day, was that Peter Gregg's re-election to the board also wouldn't be supported by ACS.

Put simply, Gregg would be airbrushed out of Leighton at the annual meeting.

Humphris was shocked. But what happened in the next 48 hours was even more shocking when the market learnt that not only would the board be radically overhauled in Hochtief's favour but the Spaniards had cut the head off the Leighton beast by immediately terminating chief executive Hamish Tyrwhitt.

Verdes would replace Tyrwhitt as chief executive and continue to run Hochtief. He would accelerate the turnaround of Leighton then return to Spain to head up ACS.

The bloodied coup left Leighton's 55,000 staff confused and stunned by the sudden turn of events and more importantly what next would come in a saga that has gone on for years.

Would John Holland be sold? Would staff be slashed? What other assets would be sold and how could the Spanish leader be CEO of two companies? These were just a few of the questions going through the minds of staff and investors.

The loss of Tyrwhitt was a big surprise as he was known to have had a close relationship with the Spaniards, particularly Verdes.

Indeed he dined with Verdes at Ocean Room restaurant in Sydney that Sunday night.

In an interview just over a year ago Tyrwhitt described Verdes as a friend. ''We get along incredibly well. There is a long history of trust between us. He is a contractor. It is in his blood.''

But the plan to take out Tyrwhitt's right hand man, Gregg, at the annual meeting without consulting him, was a deal breaker and left a void at Hochtief.

Speculation is rife that the Spaniards had expected Tyrwhitt to replace Verdes at Hochtief.

It is believed that Verdes did not expect Tyrwhitt's resignation. The 50-year-old Tyrwhitt had worked at Leighton for 27 years and people close to him say he is gutted at leaving the company. He was often seen zooming around in his car sporting customised number plates LEIGHTON.

Between the Hochtief proposal arriving at 8.30am on Monday and 4am on Thursday, a series of meetings took place between Gregg, Tyrwhitt and the independent directors to decide the best way to deal with Hochtief's proposal to buy up to 15 per cent of the company at $22.15 a share.

Well placed sources say the many discussions resulted in a decision to bring forward Gregg's departure by offering his immediate resignation in return for a sweetened offer for shareholders and a generous payout. Tyrwhitt offered his resignation to strengthen the chances of a higher offer for shareholders. The result was a combined $20 million payout for Gregg and Tyrwhitt - which angered shareholders as too generous - and an extra 35c a share to shareholders.

Humphris agreed to stay on as ''independent chairman'' and the other three directors agreed to go quietly.

The job was done.

A meeting of about 100 staff at Stanley's cafe (named for Stanley Leighton, the company's founder) shortly after the sweetened offer was released to the ASX, adds weight to the speculation that Tyrwhitt's departure from the empire wasn't part of the plan.

During the meeting, Verdes, who said he was flying out of the country that night and would return Monday week, was asked who Gregg and Tyrwhitt's replacements should report to while he was in Essen tying up loose ends.

He is believed to have said ''everybody reports to Hamish. You can call Hamish because he is an adviser''. The suggestion was that Tyrwhitt might return to head office to fill in for a few days.

Whether Tyrwhitt emerges as the next boss of Hochtief is anybody's guess.

But a former senior executive at Leighton said the likely scenario is that Hochtief will eventually take 100 per cent control of Leighton and keep Hochtief as the listed mother ship for construction.

The brutal reality is a listed Hochtief is required for the banking facilities. Once ACS' and Hochtief's balance sheets are repaired, via more asset sales and cost cutting, Leighton's listing will no longer be necessary.

The country's biggest construction company, which has built some of the country's biggest roads, tunnels, buildings and overseas projects, has gone through more twists and turns than a game of snakes and ladders in the past few years.

To understand the dynamics of Leighton requires a history lesson on when each of the three companies first came together and the machinations between Leighton, Hochtief and ACS since then.

Hochtief bought into Leighton in 1981. Back then it was 10 times the size of the Australian company. Leighton now dwarfs Hochtief. For most of that time it was a passive investor. Part of the reason was its former chief executive Wal King had run the company successfully, running it for 24 years and taking it from a market cap of $70 million to one that hit almost $10 billion before he left. It is currently worth $7 billion.

When ACS took a 20 per cent holding in Hochtief in March 2006 before increasing it to 29.9 per cent, the maximum allowable under German law without launching a takeover bid, things started to change. As one former senior Leighton executive says: ''The shark was let into the fish tank.''

Relations between the Spanish and the Germans are complex and when Hochtief came under attack from ACS in 2009 as it tried to buy more shares in the company, it tried to merge with Leighton to defend itself against the Spanish.

King would not play ball. He knew Leighton delivered consistently the bulk of Hochtief's annual profits and its share price, and believed the deal was not in the best interests of minority shareholders.

The Germans, incensed by King's decision not to back the merger, decided to replace him, along with Dieter Adamsas, a former deputy chief executive.

The toxicity blew up during a board trip to Mongolia and Hong Hong in June 2010 when they learned that King had flown to Madrid days before to discuss an alliance between Leighton and ASC. This enraged Hochtief and to this end the company accelerated plans for King's retirement. In the words of the former executive ''King was feeding the shark''.

At the last minute a peace deal was brokered in a hotel room in Hong Kong, but a few months later the board had allied itself with Hochtief and King's retirement was back on the agenda.

By September 2010 he told the market he would step down early the following year and David Stewart would replace him. At that time the Leighton share price was trading at $38 and it had recorded a record profit.

The Spaniards weren't happy that the Germans were forcing King out.

Indeed, on the day of his announced resignation speculation emerged in Europe that ACS would make a takeover bid for Hochtief, sell off its assets and influence the ownership of Leighton. Days later the speculation became a reality.

It was an emotionally charged takeover battle and Hochtief went down kicking and screaming, with the help of the Leighton board, including Gregg, who tried to make it hard for ACS to succeed. The Spaniards didn't forget this.

A lot happened in the 12 months following King's resignation and ACS' decision to pounce on Hochtief. Leighton's share price lost more than a third of its value, it was onto its third chief executive and second chairman, there were a number of profit downgrades, project blowouts, a big equity issue and the departure of a string of experienced senior managers.

Fast forward to today and Leighton is about to go through another twist, post the annual meeting.

By then Hochtief, backed by the puppet master ACS, will own almost 75 per cent, its board will be ruled by Hochtief and its so-called independent chairman Bob Humphris will have less of a voice than he does now.

It is up to minority shareholders to decide whether they want to stay for the ride. Verdes told investors on Thursday he will not be a ''fly-in fly-out'' chief. ''I'm going to be moving to Australia. I'm going to spend all necessary time … to improve [Leighton]. It is my challenge.''

Wal King said change at Leighton was inevitable but happened at a faster rate than anyone had anticipated. He said it was sad to see a truly great construction company move into offshore hands.

''Nonetheless ACS are great contractors and Marcelino understands what is required in a construction company,'' he said. ''After the period of instability with the ACS/Hochtief acquisition and the Stewart era, Hamish and Peter Gregg brought stability to the company, it is sad day.

''The company will enter a new period and hopefully growth and prosperity will be achieved for all shareholders.''