Lendlease shares closed 3.6% lower at $18.09 on Tuesday as the company says that a potential buyer, understood to be John Holland, has pulled out of the sales process for its $300 million services unit.
The confirmation of the Chinese-owned company’s exit came just a month after the bulk of the engineering business was sold to Spanish group Acciona.
The Steve McCann-led building giant was stuck with a heavy exposure to the troubled $11 billion Melbourne Metro Tunnel Project after that deal in which it received just $180 million.
The services arm had been considered a more attractive unit than the engineering branch, which triggered a shock writedown in November 2018 that wiped more than $2 billion off the company’s market value.
Lendlease’s shares touched a low $18.02 on Tuesday as the company remained in talks with the Victorian government about the problem Melbourne tunnelling project and Acciona is unlikely to buy the company’s interest while the situation remains unresolved.
Lendlease has a 33% interest in the consortium building the tunnel, along with John Holland and Bouygues Construction.
Investment banks Morgan Stanley and boutique adviser Gresham Partners are selling both the services and engineering divisions.
Lendlease said that “notwithstanding the withdrawal in the last week of a party with whom we had been negotiating, the sale process for the services business continues”.
The company says the services business has had a solid start to the year and remains on track to meet its financial targets for fiscal 2020.
“The business has successfully won and converted contracts from an attractive pipeline of opportunities,” Lendlease says.
JPMorgan analyst Ben Brayshaw says news of John Holland’s withdrawal is a surprise, given the services business is generally seen as a desirable platform with a consistent profit history.
The analyst had assumed the sale would realise $300m and has now lifted its projected gearing levels to 18% for June 2020.
“With this latest news regarding the services business, and Lendlease retaining its exposure to Melbourne Metro, the balance sheet takes on additional importance, in our view,” Mr Brayshaw said.
The analyst cut its price target by 7% to $21 but kept its buy recommendation. “We believe the shares are still undervalued, but reliability of earnings is somewhat reduced,” he says.
The company has been making progress elsewhere and secured the backing of its main wholesale office fund for a slice in a $1.2bn tower it is building in North Sydney. The move will help boost the company’s momentum as it heads into reporting season next month, with the 25 per cent interest in the Victoria Cross over station tower sold to the Lendlease’s Australian Prime Property Fund Commercial.
The North Sydney deal was signed on December 21 and comes as the next-generation tower is being prepared for potential anchor tenants with real estate agencies CBRE and JLL handling the search.
The planned 40-storey office building will integrate retail aspects and public space above the new Sydney Metro railway network.
Lendlease has also reported progress on a major Asian deal with the retail-led mixed development component of its The Exchange TRX project in Malaysia on track to be 90 per cent leased by end of 2021.
This article originally appeared on www.theaustralian.com.au/property.
