Ferrovial takes on British mannerisms

United Kingdom and services increasingly important for the Spanish group

Spanish construction and services group Ferrovial’s British affiliate BAA this week sold its fully-owned Edinburgh airport to Global Infrastructure Partners for 807.2 million pounds (988 million euros) after being obliged to offload either it or Glasgow airport by the Competition Commission. However, its appetite for things British has far from waned. Its British services unit Amey recently won two contracts in Britain worth 3 billion euros.

Britain and its Ferrovial Services unit have become the backbone of the group’s business and earnings at a time when the demands of austerity in Spain have seen spending on public works slashed, while the homebuilding sector remains in a dire slump. In the first four months of the year, the group’s services division, which accounts for 38 percent both of annual sales and gross operating profit in the form of EBITDA, won contracts worth over 4 billion euros.

During its Investor’s Day meeting at the end of November, Ferrovial forecast compound annual growth in turnover of between five and eight percent in the period 2011-2015. The company told analysts it does not rule out making small acquisitions to complement its services division and is also looking at further expansion overseas.

The latest big contract won by Ferrovial Services less than a month ago was from the municipal government of the British city of Sheffield. The 25-year contract is worth 2 billion pounds (2.4 billion euros) and entails the upkeep of the city’s entire urban infrastructure. Amey will be responsible for the maintenance of 1.900 kilometers of roads, 68,000 street lights, 500 sets of traffic lights, 600 bridges, 2,400 walls and 35,000 trees that line the streets. Up to 500 Sheffield City Council staff will be transferred to Amey once the contract starts.

Spanish broker Renta 4 estimates the Sheffield contract represents 38.8 percent of Amey’s order book and 19 percent of that of Ferrovial Services.

The contract is similar to one won by Amey a few years back from the municipal government of the British city of Birmingham for the maintenance of roads and other infrastructure worth 2.7 billion pounds (3.1 billion euros).

“This decision reaffirms our leading position in the UK and our model based on cost optimization through integrated management of services and a long-term commitment to the city,” Santiago Olivares, CEO of Ferrovial Services, said after the Sheffield contract was awarded. “Both Sheffield and Birmingham are two clear examples, on a global scale, of efficiency, innovation and service to citizens,” he added.

Overseas business now accounts for 55 percent of Ferrovial’s revenues, with Britain accounting for 21 percent, which is more than Spain. Apart from construction, services and airport management, Ferrovial also operates toll roads. Its Cintra division manages 23 toll roads in Spain, Ireland, Portugal, Greece, Chile, Canada and the United States. It has 2,841 kilometers of toll roads involving an investment of 16.2 billion euros.

Ferrovial, which is controlled by the Del Pino family, estimates that the administrators of cities of over 100,000 inhabitants, such as Sheffield and Birmingham, that outsource integrated services such as those supplied by Ferrovial can earn cost savings of between 15 and 20 percent.

At the end of December, Ferrovial was one of three companies shortlisted by a group of nine towns in Yorkshire in England for a contract worth 383 million pounds (460 million euros) to provide services over the next four years that include civil engineering, paving, traffic control, street signs and lighting.

Analysts have noticed how the need for austerity in public spending has thrown up opportunities for companies such as Ferrovial. “The need of local authorities to reduce costs could translate into long-term opportunities for Ferrovial,” Morgan Stanley said in a research note after the Investor’s Day. It said Ferrovial represents a structural growth story at a time of low growth in general.

The second-biggest contract Ferrovial Services has won so far in 2012 was also sealed by Amey, which will be responsible for the electrification of the Great Western Main Line railway that runs from London to the west of England and south of Wales. That contract is worth 700 million pounds (800 million euros).

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