Contractors are falling like flies in the aftermath of the resources boom. Some, like UGL and Broadspectrum, have been snapped up by aggressive competitors. Others, like Macmahon Holdings, are starting 2017 with unwelcome takeover battles or have collapsed.
But Downer EDI is a survivor. Over the past 12 months the company's shares have more than doubled to close at $6.45 on Friday, with the stock trading at its highest levels since early 2010. It is winning contracts in a broad range of sectors, spanning from rail manufacturing to mining services, and from renewable energy to telecommunications.
Chief executive Grant Fenn acknowledges that had Downer not sorted out its problems earlier this decade with its troubled NSW Waratah trains contract – which cost the company hundreds of millions of dollars in writedowns due to cost blow-outs and delays – it too may have ended up becoming a takeover target.
"Most of the companies that have been consolidated have been consolidated at a fraction of their historic value," Fenn tells AFR Weekend.
"Six or seven years ago in the middle of the Waratah issue we were vulnerable, without a doubt. But we got that solved and the business has been very strong since, so we've been in a different position – we've been one of the acquirers."
Although with engineering group Tenix, which Downer bought for $300 million in 2014, the contractor has been quietly purchasing smaller businesses, such as RPQ Group, which provides road construction and maintenance services, and AGIS, which provides project management services for government agencies, including the Department of Defence.
Fenn says he has "no interest" in making a counter-bid for Macmahon, which received a $174 million hostile takeover offer from Spanish-run construction group CIMIC this week.
But he does want to keep diversifying Downer, believing that strategic acquisitions can create opportunities.
Ausgrid adviser
"I don't see a lot of benefit in paying large multiples for bits of businesses that look very similar to you."
Tenix, which specialises in operations and maintenance services for the power and water sectors, has enabled Downer to become an advisor to the new owners of NSW electricity distribution group Ausgrid, IFM and AustralianSuper, and potentially pick up similar roles after NSW sells another electricity network, Endeavour Energy, and WA sells Western Power.
Fenn argues that the culture of Downer has changed "dramatically" since he took over as CEO in mid-2010. Fenn has pushed employees to think of the contractor as a "services" business that works in the best interests of its customers rather than a construction group that tries to "skin everything" out of every deal it does.
"When you run a services business, your customer has to want you," he explains. "In construction, they'll bring you in because you're the cheapest."
The focus on service has paid off in Downer's rail business, with the group building on the eventual success of the Waratah trains – rated the most comfortable and reliable trains in Sydney in 2016, they were designed by Downer and made by China's Changchun Railway Vehicles (CRC) – to deepen its relationship with the Chinese group and bid for more rail contracts.
Downer has won two out of three of the big rail contacts it has tendered for as part of consortiums, including a $2 billion contract to deliver Victoria's high-capacity Metro trains project and a $1 billion suburban trains contract for Sydney's rail network. But it missed out on NSW's $2.8 billion intercity fleet rail contract, forcing it to expend $7 million in after-tax bidding costs.
"We were never going to win three [contracts], so two's great," Fenn says.
Positive China ties
The CEO maintains a close personal relationship with CRC, travelling to China often to ensure the trains meet expected standards. "We regularly catch up at the most senior levels, and with the Victorian trains the Chinese are spending more time in Australia," he says. "I would expect that I would be in China every couple of months."
Thinking innovatively also helped Downer's 50-50 transport venture with French group Keolis win a $450 million, 10-year contract to run an integrated public transport system in Newcastle – the first time in Australia that contracts for different kinds of transport have been handed to one operator to manage as a single system.
The Keolis Downer joint venture, Newcastle Transport, will start running bus and ferry services in July 2017 and a new light rail system from 2019.
Mining services accounted for just one-third of Downer's earnings before interest and taxation (EBIT) in 2015-16, but are expected to rise "quite significantly" as a proportion of overall profits if Indian conglomerate Adani goes ahead with its $16.5 billion Carmichael coal mine in Queensland.
Adani, which has appointed Downer as its preferred contractor, has said it will start building the controversial mine this year, but has not yet made a final investment decision.
Fenn has been out in regional Queensland over the past week on roadshows with Adani talking to potential suppliers of materials and equipment that will be needed to build and operate the mine. Asked when Adani was likely to start work, Fenn said he believed the Indian group was "very close."
"Green shoots" are appearing in the mining business as commodity prices rebound, Fenn says, but added competition for contracts has "never been stronger".
"You can't just turn up and bid for jobs anymore, you have to be working very hard ahead of time and putting very smart solutions on the table or you will not win."
