Dealtalk: UK’s Costain likely target of Turkey’s Renaissance

By Lorraine Turner and Evrim Ergin

LONDON/ISTANBUL (Reuters) – Britain’s Costain Group Plc (COSG.L: Quote, Profile, Research) is the likely target of Renaissance Construction, as the Turkish building group seeks a partner with deep roots in high-potential markets.

Board chairman Erman Ilicak said last month that Renaissance, one of Turkey’s three largest construction groups, was in early-stage talks to take a controlling stake in an unnamed, 140-year-old British company.

Ilicak told reporters the potential target specialized in building nuclear plants, railways and water networks and had annual revenue of 1.5 billion euros.

The detailed description, analysts say, points squarely at Costain: “It’s difficult to come up with too many more suggestions (other than Costain),” said Panmure Gordon analyst Andy Brown.

Costain’s bid to buy Mouchel (MCHL.L: Quote, Profile, Research) failed recently, after the struggling support services firm struck an alternative deal with Interserve Plc (IRV.L: Quote, Profile, Research).

Brown said the “bid shadow” of Renaissance could also explain Costain’s reluctance to go hostile in its pursuit of Mouchel.

One wrinkle, however, is a gap in valuation: Costain’s market value is about 150 million pounds ($245 million), compared with a 300 million euro ($417 million) value cited by Ilicak.

Even adding a typical takeover premium of about 30 to 40 percent, Costain’s equity value would be some way below that. In “enterprise value” terms, the gap is even bigger, since as of November Costain had more than 100 million pounds in cash.

“Everything points to Costain except the valuation,” said Robin Hardy, an analyst at Peel Hunt, saying it would be a “fairly punchy” deal.

But he added: “You never know what view somebody takes from what they think they can add, by combining their business with an existing business, or what they think they might be able to leverage out of it.”

If Renaissance succeeds, it would be one of the biggest takeovers in Western Europe ever by a Turkish firm, according to Thomson Reuters data. Turkish buyers have only struck seven takeovers in Western Europe worth more than $100 million, the data show.

Costain declined to comment, as did its two major shareholders, Kuwait’s Al Kharafi and UEM Builders, a unit of Malalysia’s UEM Group, which each have stakes of about 22 percent.

BUYING A BRAND

Renaissance, known as Ronesans in Turkish, already operates in Turkey, Russia, Ukraine, Libya and Saudi Arabia.

Any eventual deal would allow Renaissance to build on Costain’s track record and established relationships in what could be lucrative markets. About $4.3 trillion will be spent on construction across the Middle East and North Africa over the next decade, PwC forecasts.

“The brand is important,” said Hardy at Peel Hunt. “Costain gets to work in areas that you wouldn’t expect a company of its size to get work in, simply because of the reputation from years past.

Costain’s long history in Middle Eastern civil engineering spans completing the Trans-Iranian Railway in 1939 to Dubai International Airport in 1960.

It worked on a 1970s boom in the Gulf, particularly the United Arab Emirates (UAE); helped develop Abu Dhabi’s Das Island; and has a strong presence in the emirate after working on several large oil and gas projects.

“Some tenders have prerequisite conditions that demand having taken part in similar projects before. That’s why we are interested in old firms in Europe,” Ilicak said, adding the target had participated “in many important projects.”

Renaissance has already created a jointly owned Middle Eastern venture with Porr (ABGV.VI: Quote, Profile, Research) of Austria, after snapping up a 10 percent stake in Porr two years ago. It said recently it wants to increase its stake.

Kharafi and UEM bought their stakes in Costain more than a decade ago. The business nearly collapsed after spiraling losses in the late 1990s, and undertook a 60 million pound rights issue in 2007.

($1=.6131 Pound)

($1=.7202 Euro)

(Additional reporting by Ahmed Hagagy, Min Hun Fong, Greg Roumeliotis and Quentin Webb; Editing by David Cowell)