Cintra is in line for TxDOT contracts that could someday be worth up to $36 billion.
Ferrovial: Building a New Future
June 27, 2006
By Joan Tarzian
BusinessWeek
Copyright 2006
Like others in the construction industry, the Spanish giant is diversifying into facilities management. That's why it spent $19 billion for BAA
Ferrovial's name was in the headlines for months as it battled investment banking giant Goldman Sachs (GS) to acquire the British Airport Authority (BAA), operator of airports in seven cities in England and Scotland, including London's huge Heathrow. In the end, the Spanish construction giant carried the day over its richer rival with a $19.12 billion bid. But why was it so eager to dish out the big bucks for a string of airports?
The answer lies in the rapidly changing nature of the construction industry. Started in 1952, Ferrovial grew from building and maintaining tracks for Spain's state-owned railroad (hence its name) into the country's leading construction firm. Its greatest claim to fame: The Madrid-based company built the gorgeous and fiendishly complex Guggenheim Museum in Bilbao designed by Frank Gehry.
But construction is a highly cyclical and often low-margin business. So starting in the 1990s, Ferrovial, like many competitors, began diversifying into facilities management. It established a subsidiary called Cintra that runs toll roads and parking garages, many in Spain, and began shopping aggressively for similar opportunities around the world.
Using Expertise
The diversification effort has been remarkably successful. Ferrovial now has 79,000 employees in 40 countries and booked revenues last year of $11.3 billion. It runs the Sydney Airport, the Chicago Skyway, parts of the London Underground, and Canada's 407 ETR toll road. All told, the company booked nearly 10% of its 2005 revenues from contracts to manage public facilities. More important, those contracts generated more than one-third of Ferrovial's $1.1 billion in operating profits.
The company won't comment to the press, but a spokesman underscored that Ferrovial believes its success comes from buying controlling interests in companies whose activities map closely into its existing expertise.
Ferrovial isn't the only construction firm eying facilities management to boost margins and smooth the uneven flow of building projects. France's giant Vinci runs numerous parking garages and last year bid more than $11 billion to acquire from the French government the cash cow Autoroutes du Sud, toll roads that fan out from Paris to the Riviera.
Still Waiting
French archrival Bouygues is also expanding from construction into facilities management. But Ferrovial has done even better than its competitors. The company figures that with the addition of BAA to its portfolio, it will earn 2006 operating profits of $3.8 billion—twice those of Vinci and 12% more than Bouygues.
Those prospects haven't yet shown up in Ferrovial's share price. It's currently trading at €58.2, or $73.33, flat for the year and 17% off its May 10 peak. Yet most analysts think Ferrovial has plenty of upside. Barcelona-based S&L La Caixa says the company's track record of generating value from acquisitions shows every sign of continuing. And construction sector analyst Rob Crines at JP Morgan (JPM) in London thinks Ferrovial shares "have underperformed compared to the potential from the [BAA] deal."
It has been a long road for Ferrovial. Founded during the Franco regime by Rafael del Pino y Moreno, it grew over the decades on a diet of state railroad contracts and construction projects. But when Spain joined the European Union in 1986 and infrastructure funding began pouring in from Brussels, Ferrovial took off with lucrative modernization and development projects. Del Pino's son Rafael del Pino Calvo-Sotelo took over as president in 1998, and the same year, Ferrovial launched its Cintra facilities management unit.
Working Model
At the end of the decade, Ferrovial took a huge step up. In 1999, it bought Spanish construction rival Agromán, leapfrogging to become the country's largest construction company. And the same year, it went public on the Madrid bourse, selling $5.3 billion in shares on the Madrid exchange. The del Pino family still controls 58% of the company, which is currently valued at $10.3 billion.
Since then, the company has accelerated its globalization. In 2000, it bought Poland's largest construction group, Budimex, and also snagged a contract to manage the airport in Bristol, England. Two years later, a consortium led by Ferrovial won a bid to manage the Sydney Airport. "Ferrovial has made its business model work in the companies it has bought over the years," says Manuel Romero, finance professor at Madrid-based business school Instituto de Empresa.
More recently, the company has turned its attention to the U.S. It scored a breakthrough in early 2005, when it signed a 99-year, $1.83 billion deal to manage the Chicago Skyway—the first privatization of an existing highway in U.S. history. The 8-mile (12.5 km) road, built in 1959, connects the city to the Indiana Toll Road, which Cintra also now manages. Even bigger prospects are in store. Since buying Houston-based construction company Webber for $220 million last year, Cintra has gotten in line for Texas transportation department contracts that could someday be worth up to $36 billion.
Deep Pockets
Now, as Spain's construction market starts to cool and a slackening of EU infrastructure subsidies looms, Ferrovial is turning to services as never before. Its most outrageous play to date is the BAA acquisition. The company holds a 64% share in the consortium of victorious bidders, which also includes the Caisse des Depot de Quebec and a venture capital arm of the Singapore government, called GIC Special Investments. Debt financing for the deal will come from Citigroup (C), Royal Bank of Scotland, Santander (SAN), HSBC (HBC), and Calyon.
BAA earned annual revenues of $4.15 billion in the year ended Mar. 31, and sales should edge up over the next decade as passenger volumes increase annually by around 3%. But what's far more interesting to Ferrovial is BAA's rich—and predictable—cash flow. Last year, it spun out nearly $1.8 billion in operating cash. That's gravy for the Spanish company, which already scores 43% of its revenues, and 46% of pre-tax profits, outside Spain.
With BAA in its pocket, Ferrovial expects to more than triple pre-tax profits this year. Not a bad outcome for an outfit of modest beginnings and global ambitions.
Tarzian is a correspondent for BusinessWeek in Madrid
© 2006 by The McGraw-Hill Companies Inc. : www.businessweek.com
June 27, 2006
By Joan Tarzian
BusinessWeek
Copyright 2006
Like others in the construction industry, the Spanish giant is diversifying into facilities management. That's why it spent $19 billion for BAA
Ferrovial's name was in the headlines for months as it battled investment banking giant Goldman Sachs (GS) to acquire the British Airport Authority (BAA), operator of airports in seven cities in England and Scotland, including London's huge Heathrow. In the end, the Spanish construction giant carried the day over its richer rival with a $19.12 billion bid. But why was it so eager to dish out the big bucks for a string of airports?
The answer lies in the rapidly changing nature of the construction industry. Started in 1952, Ferrovial grew from building and maintaining tracks for Spain's state-owned railroad (hence its name) into the country's leading construction firm. Its greatest claim to fame: The Madrid-based company built the gorgeous and fiendishly complex Guggenheim Museum in Bilbao designed by Frank Gehry.
But construction is a highly cyclical and often low-margin business. So starting in the 1990s, Ferrovial, like many competitors, began diversifying into facilities management. It established a subsidiary called Cintra that runs toll roads and parking garages, many in Spain, and began shopping aggressively for similar opportunities around the world.
Using Expertise
The diversification effort has been remarkably successful. Ferrovial now has 79,000 employees in 40 countries and booked revenues last year of $11.3 billion. It runs the Sydney Airport, the Chicago Skyway, parts of the London Underground, and Canada's 407 ETR toll road. All told, the company booked nearly 10% of its 2005 revenues from contracts to manage public facilities. More important, those contracts generated more than one-third of Ferrovial's $1.1 billion in operating profits.
The company won't comment to the press, but a spokesman underscored that Ferrovial believes its success comes from buying controlling interests in companies whose activities map closely into its existing expertise.
Ferrovial isn't the only construction firm eying facilities management to boost margins and smooth the uneven flow of building projects. France's giant Vinci runs numerous parking garages and last year bid more than $11 billion to acquire from the French government the cash cow Autoroutes du Sud, toll roads that fan out from Paris to the Riviera.
Still Waiting
French archrival Bouygues is also expanding from construction into facilities management. But Ferrovial has done even better than its competitors. The company figures that with the addition of BAA to its portfolio, it will earn 2006 operating profits of $3.8 billion—twice those of Vinci and 12% more than Bouygues.
Those prospects haven't yet shown up in Ferrovial's share price. It's currently trading at €58.2, or $73.33, flat for the year and 17% off its May 10 peak. Yet most analysts think Ferrovial has plenty of upside. Barcelona-based S&L La Caixa says the company's track record of generating value from acquisitions shows every sign of continuing. And construction sector analyst Rob Crines at JP Morgan (JPM) in London thinks Ferrovial shares "have underperformed compared to the potential from the [BAA] deal."
It has been a long road for Ferrovial. Founded during the Franco regime by Rafael del Pino y Moreno, it grew over the decades on a diet of state railroad contracts and construction projects. But when Spain joined the European Union in 1986 and infrastructure funding began pouring in from Brussels, Ferrovial took off with lucrative modernization and development projects. Del Pino's son Rafael del Pino Calvo-Sotelo took over as president in 1998, and the same year, Ferrovial launched its Cintra facilities management unit.
Working Model
At the end of the decade, Ferrovial took a huge step up. In 1999, it bought Spanish construction rival Agromán, leapfrogging to become the country's largest construction company. And the same year, it went public on the Madrid bourse, selling $5.3 billion in shares on the Madrid exchange. The del Pino family still controls 58% of the company, which is currently valued at $10.3 billion.
Since then, the company has accelerated its globalization. In 2000, it bought Poland's largest construction group, Budimex, and also snagged a contract to manage the airport in Bristol, England. Two years later, a consortium led by Ferrovial won a bid to manage the Sydney Airport. "Ferrovial has made its business model work in the companies it has bought over the years," says Manuel Romero, finance professor at Madrid-based business school Instituto de Empresa.
More recently, the company has turned its attention to the U.S. It scored a breakthrough in early 2005, when it signed a 99-year, $1.83 billion deal to manage the Chicago Skyway—the first privatization of an existing highway in U.S. history. The 8-mile (12.5 km) road, built in 1959, connects the city to the Indiana Toll Road, which Cintra also now manages. Even bigger prospects are in store. Since buying Houston-based construction company Webber for $220 million last year, Cintra has gotten in line for Texas transportation department contracts that could someday be worth up to $36 billion.
Deep Pockets
Now, as Spain's construction market starts to cool and a slackening of EU infrastructure subsidies looms, Ferrovial is turning to services as never before. Its most outrageous play to date is the BAA acquisition. The company holds a 64% share in the consortium of victorious bidders, which also includes the Caisse des Depot de Quebec and a venture capital arm of the Singapore government, called GIC Special Investments. Debt financing for the deal will come from Citigroup (C), Royal Bank of Scotland, Santander (SAN), HSBC (HBC), and Calyon.
BAA earned annual revenues of $4.15 billion in the year ended Mar. 31, and sales should edge up over the next decade as passenger volumes increase annually by around 3%. But what's far more interesting to Ferrovial is BAA's rich—and predictable—cash flow. Last year, it spun out nearly $1.8 billion in operating cash. That's gravy for the Spanish company, which already scores 43% of its revenues, and 46% of pre-tax profits, outside Spain.
With BAA in its pocket, Ferrovial expects to more than triple pre-tax profits this year. Not a bad outcome for an outfit of modest beginnings and global ambitions.
Tarzian is a correspondent for BusinessWeek in Madrid
© 2006 by The McGraw-Hill Companies Inc. :
posted by Porkus Maximus Tex: at Tuesday, June 27, 2006
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