McInerney Holdings has embarked on a risky strategy. By acquiring William Hargreaves Holdings Limited (WHL), a loss-making British contracting and house building company, with a negative net worth, it is entering uncharted territory. The group is now reaping the benefits from a major restructuring programme and the buoyant Irish market. Should it not play safe by staying in this market and further build up its domestic market share?
McInerney argues that it is expanding in the Irish market but it would be too costly to buy an Irish building company. The best strategy, therefore, is to expand into the British market and spread the risks. It also argues that the "time is right to enter the UK construction market in a measured way" and "WHL represents a low capital cost means to achieve this goal with turnaround potential".
Six months ago there were many question marks over the British house building market. However, the recent signs are far more positive. Abbey, the house building group, said a recovery came too late to boost volume for its year ended April 30th, 1999. And the first quarter - May, June, July - was the "best for a decade", according to executive chairman, Mr Charles Gallagher. Although Abbey operates in the south of England and WHL operates much further north in Lancashire, there does appear to be a pick-up and, if sustained, McInerney's timing appears opportune. However, for WHL to be successful, a number of structural changes will be needed. WHL incurred a loss of £1.7 million sterling last year. This, McInerney said, was primarily due to a £697,000 write off of land and work in progress to more prudent levels, and non-recurring costs of £552,000.
If these exceptionals are excluded, it appears that WHL had an underlying loss of almost £500,000. And it looks as if it was in the red before interest payments.
Clearly its costs are too high and, with net debt of £5.75 million, borrowings are also excessive. The impact of central costs will be reduced by increasing the volume of work, McInerney says, while it is providing a non-interest bearing loan of up to £600,000 and there may be an interest bearing development loan of up to £2.15 million.
That begs the question - is McInerney getting sucked in too deeply? Add that to the net debt of £5.75 million it is taking on, the agreement to pay £750,000 for the WHL shares and an additional payment of up to £850,000 if certain targeted earnings are to be achieved, certainly looks as if it is getting in deeply.
However, the group only has the £750,000 at risk. The £600,000 is secured and non-recourse to the group. The £2.15 million development loan would be secured against new sites. The additional consideration will only be triggered if targeted earnings are reached, and if they are, group earnings would be boosted.
And there are potential gains to come from its 50 per cent interest in the Riverside Business Park, a joint venture established to develop a major inner city regeneration site in Bolton. It understood that the value of this is not fully reflected in WHL's balance sheet.
This, according to reliable sources, could generate £1.5 million to £2 million for McInerney. And there are potential benefits from WHL's accumulated tax losses. Provided WHL generates profits, McInerney could get back its investment over a short period, possibly, two years.
The present McInerney management team has the credentials to turnaround WHL. This has been amply demonstrated during its tenure at McInerney - a company strangled with debt, turned itself into a profitable group, with the concerted effort of shareholders, bankers and management. And it is understood to be running ahead of budgets this year. Putting the necessary financial structures into WHL is the easy part. Providing it with a viable and growing business, in a less conducive business environment, will be more difficult. But McInerney has greater prospects to make it work this time than a decade ago when the British division almost wiped it out.
