Wilson Bayly Holmes – Ovcon (WBHO), South Africa’s largest construction company, is pulling out of Australia, citing the country’s harsh response to COVID-19 has impacted its property market and created business uncertainty.
In a statement, WBHO said Australia’s construction environment has become increasingly competitive and contractual, with the potential risk on large mega-build projects exceeding the margins currently available.
“With this in mind, the company has implemented a more conservative bidding strategy focused on securing low-risk, less complicated projects. Based on this approach, the company intended to see some decline in backlog as we reduced our exposure to high-risk projects. However, finding acceptable projects has been made more difficult with the procurement activity and number of available projects impacted by COVID-19,” WBHO told shareholders in its announcement.
“The Australian Government’s hardline approach of managing Covid-19 through a combination of border restrictions, instant lockdowns and mandatory work from home regulations for many sectors, has had a huge impact on property markets as well than on other industries such as the leisure industry.
“Border restrictions have prevented hundreds of thousands of foreign students, tourists and investors from entering the country. Population levels in the two major cities of Melbourne and Sydney have thus recorded negative growth. The impact of lockdown restrictions on the retail, hospitality, leisure and commercial office sectors of the construction markets has created high levels of business uncertainty in Australia and has significantly reduced demand and delayed the awarding of new projects in these key sectors of the construction industry,” he added.
The WBHO’s decision to close its Australian businesses runs counter to government claims that stimulus packages for two years of stop-start closures have saved businesses and jobs. The company said it had been monitoring the business operations of WBHO Australia (WBHOA) for a considerable period and had done all it could to contain costs and restore a level of profitability.
However, unforeseen restrictions related to COVID-19, the contracting environment and the increased difficulty in securing the facilities necessary to secure new work have prevented companies from completing projects on time and have not been able to retrieve variation and delay requests. This resulted in material losses and the need for additional financing and balance sheet support for subsidiary WBHO Construction (WBHOC).
WBHOA is a wholly owned subsidiary of WBHO, with its shares held through another of its wholly owned subsidiaries WBHOC. The company added that over the past four years it has provided financial assistance through WBHOC in the form of equity investments amounting to US$130.6 million, as well as guarantees. from the parent company to guarantee facility providers, to enable WBHOA to continue to operate.
WBHO cuts construction activity after Probuild deal fails
In 2020, the WBHO said it had entered into negotiations with a third party to sell its Probuild business, and the transaction had progressed to the terms agreed in December 2020, but the inability to obtain approvals from the Australian Foreign Investment Review Board blocked the deal.
Following this, WBHO said it implemented a strategy to reduce the size of the company, as well as other sale options which proved unsuccessful due to concerns from potential acquirers about the impact of the Australia’s regulatory approach to the COVID-19 pandemic.
Probuild has been in operation since 1987 and has worked on several high-profile commercial projects, including the new headquarters of biopharmaceutical giant CSL and a new police headquarters in Victoria.
Given the many issues, the WBHO Board decided after lengthy discussions that the level of risk versus reward in the Australian construction market was not acceptable, particularly given the implications for all WBHO stakeholders and WBHOA’s historical performance.
“The Board can no longer see a strategic imperative to retain WBHOA within the group,” the statement said, adding that WBHOA has significantly exhausted the group’s resources.
“[Therefore] WBHO has determined that effective February 22, 2022, the Company, through WBHOC, will no longer provide financial assistance to WBHOA. This led the WBHOA Board of Directors to begin with a request for WBHOA administration,” he continued.
The company added that it has the support of its South African financial institutions and intends to honor its existing parent company obligations to Australian institutions.
“The losses to date, as well as the closure of WBHOA and the cost of parent company bonds will have a material impact on the company’s consolidated statement of financial position and consolidated statement of financial results, but the company remains liquid and limiting WBHOA’s losses should have a positive effect on the company’s financial condition going forward,” the statement said.
Details of the financial effects of this decision will be included in the half-year results published on March 1.