Morgan Sindall fears Connaught deal won't be worth as much as anticipated

Construction group Morgan Sindall says it will take over fewer Connaught contracts than expected
CITY Morgan 3
Morgan Sindall was involved in this tunnel at Heathrow Terminal 5. It had hoped for £200m a year from Connaught's council contracts. Photograph: PA

Morgan Sindall today admitted it would not make as much as expected from a deal involving assets of the collapsed council house maintenance division of Connaught.

Two days after the Connaught Partnerships division went into administration in September, Morgan Sindall announced its subsidiary Lovell had agreed "to acquire the majority of the ongoing contracts and their related assets" from administrator KPMG for £28m.

Morgan Sindall had said the 89 council contracts would generate about £200m of additional revenues for the group annually and that the 2,500 Connaught staff that worked on them before their division collapsed would transfer to Lovell as part of the agreement.

Morgan Sindall revealed yesterdaytoday it now expected to make only £100m a year from the contracts after 44 of the local authorities declined to hand the Connaught work to Lovellsubsidiary amid concerns about falling foul of EU procurement rules that require a formal tender process. The construction group also conceded that only those Connaught staff associated with the 45 local authority contracts it has taken on would transfer to Lovell. This leaves the future of hundreds of former Connaught employees in doubt.

A Morgan Sindall spokesman acknowledged that the group's latest estimate on the value of the contracts was well below its initial announcement, but insisted that "it is still a very attractive deal and we are very pleased with the progress".

"The deal was done very quickly because it was essential to move very quickly. If we hadn't, the assets probably would have been sold elsewhere because an awful lot of people were interested," the spokesman added.

Contrary to the impression given in its original deal announcement, Morgan Sindall had not bought the Connaught contracts themselves, but rather the "contractural relationships" – in effect the hope that the client will view it favourably and hand it Connaught's contract without holding a competitive pitch.

Morgan Sindall has since said it only acquired the related assets in the KPMG deal and that it always knew it would not secure all the underlying assets.

Either way, the group is understood to have found it much harder to inherit Connaught's contracts than it expected. In addition to legal concerns, some councils have refused to move Connaught's work to Morgan Sindall because the contracts contain a clause that means they automatically terminate if the provider becomes insolvent.

Lawyers said the legal landscape was clouded because only a potential bidder for the work can take action, meaning each council had to make a judgment about whether a rival contractor might retaliate in court.

Howard Seymour, an analyst at Numis Securities, said: "To get only half of the £200m revenue projection is a bit disappointing. You might expect some attrition but I was thinking more in terms of £150m to £160m."

Morgan Sindall declined to comment on its interest in picking up contracts held by Rok, the building services company that collapsed into administration this week after it revealed sizeable losses and "serious failings" in the accounting of its plumbing division.

Sources said that while Morgan Sindall might be interested in a handful of the contracts, it was not interested in buying a significant portion because it already has a strong presence in all the areas in which Rok operates. By contrast, the Connaught contracts were attractive to Morgan Sindall because at that point it had only a small council house repair operation.

Morgan Sindall shares fell 1% today, to close at 685p.

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