Illustration: Spooner.

Illustration: Spooner.

LEIGHTON Holdings' decision to put its highly profitable telco assets on the block speaks volumes about the changed dynamics between the company, its major shareholder Hochtief and Spain's ACS, which now calls the shots.

Such dramatic changes taking place at Leighton was further demonstrated by the way a $1.5 billion contract was won with Fortescue Metals Group yesterday. Unlike previous contract tenders, where up to three subsidiaries of Leighton bid aggressively for the job, Leighton Contractors is believed to be the only operating company at the expression of interest stage.

ACS's game plan is to cut costs and sell ''non-core assets'' in Leighton and Hochtief and use as much of the money as possible to pay dividends and special dividends, to help reduce ACS's massive debt pile.

If all goes according to plan, Leighton's Nextgen Networks, Metronode and Infoplex businesses could fetch up to $1 billion, depending on the strength of the appetite of potential buyers including Telstra, super funds, private equity, TPG or iiNet.

While this is good for Hochtief and ACS, the question is whether it is good for Leighton in the long term. Nextgen is a solid earner compared with some other parts of the Leighton business. It also boasts a margin of almost 40 per cent, compared with Leighton's overall realised margins of less than 5 per cent.

Nextgen's latest financial accounts for the six months to December 31 report a pre-tax profit of $63 million, and $109 million for the year to June 30, 2011.

Leighton recently sold another solid business, Thiess Waste Management, for $218 million and last year it sold its HWE contract mining business, all of which will reduce future earnings and reduce its diversity.

Other asset sales that it is believed to be considering include its 50 per cent stake in listed property company Devine, its 32 per cent stake in Sedgman and 19.9 per cent stake in Macmahon Holdings, when their share prices rebound. There has also been talk that it might sell its Leighton Property business, an aviation services business and Indonesian contract mining. Including its telco assets, the sale of these so-called non-core assets could fetch up to $2 billion.

Hochtief, which owns 54 per cent of Leighton and in turn is 49 per cent owned by ACS, is also under the gun to sell assets. In July it sold its stake in a Chilean toll highway and there is talk its US construction assets are for sale, along with its airport concessions operations in Europe.

If there was any doubt that ACS has the ultimate power, Nextgen's accounts state that the ultimate Australian company is Leighton and the ultimate parent company is ACS. Hochtief doesn't rate a mention.

But this was always going to happen. This column predicted in November 2010 that ACS would be an active shareholder on Hochtief's share register when it lifted its stake to 29 per cent. It said: ''If all goes according to plan it will soon have the power and influence to break up Hochtief, sell off its assets, and overhaul the Leighton board, which recently fast tracked the retirement plans of chief executive Wal King after relations between King and Hochtief became toxic.'' It went on to say: ''Between now and the end of January [2011] there will be many more twists and turns in the battle to create one of the biggest construction companies in the world, but for Leighton management, the board and shareholders, they are mere pawns in the process.''

Since then, there have been changes on the Leighton board, further changes at the CEO level, significant movement in the senior management ranks and in the culture and the way the company pitches for business. Indeed, ACS said it wanted to increase its stake in Hochtief, which would put it above 50 per cent.

There will undoubtedly be more changes to come, particularly as ACS struggles under a mountain of debt and is still underwater in its Hochtief, and therefore Leighton, investments. How it will get value from Hochtief and Leighton in the short term will be through asset sales. In the longer term, if ACS remains in its current form, there could be more changes ahead.

After an emotionally charged takeover battle for Hochtief in 2010 and the early part of 2011, the Spaniards took it quietly. But with the share price of Hochtief and Leighton falling dramatically, it has cranked up the pace of change. To put it into perspective, before ACS made a move on Hochtief, Leighton was trading at $38 a share. After some shock write-downs, a full-year loss, a hefty capital raising and slashed dividends, Leighton's shares are now trading at $16.53.

The concern is that Leighton still isn't out of the woods, particularly with the Middle East, which has caused the company massive headaches. JP Morgan summed it up well yesterday when it said that while the company has had a few good contract wins recently, investors will remain focused on major issues such as Habtoor Leighton Group and balance sheet management. ''As such, we believe it will be difficult for Leighton to trade towards our $21.80/share average valuation until investors gain confidence on all major issues.'' In the meantime, ACS's grip on its subsidiaries will tighten.