Leo Quinn faces uphill battle to remove Balfour Beatty 'skeletons'

Six profit warnings. Two failed deals. Years of management turmoil. Faced with Balfour Beatty's dismal record, incoming chief executive Leo Quinn has been quietly mounting a charm offensive with analysts and investors ahead of the group's 2014 results next week, to prove he is the right man to mastermind a turnround.

At short notice last month, analysts received a drinks party invitation to meet Mr Quinn - Balfour's third top manager in two years - at the Fleet Street offices of the group's public relations company. They duly arrived at 5pm two days later, as requested, because Mr Quinn would be leaving at 6pm sharp.

In the 55 minutes that followed, Mr Quinn - who won plaudits when he oversaw the privatisation of De La Rue, the bank note printer, and the turnround of Qinetiq, the defence research company - left unanswered questions about his suitability to lead Balfour. He jokingly likened his appointment at the group to Henry's V's victory at the Battle of Agincourt, saying he had been "bloody brilliant" in past corporate crisis situations.

"He's got form in turnround and is clearly a natural leader, but then this is more murky and messy than anything he ever tackled at Qinetiq or De La Rue," said one analyst who attended the drinks party. "Even he has publicly admitted to an uphill struggle given the group's organisational complexity and lack of transparency."

Another analyst's view was more frank, saying: "There are so many skeletons still to fall out of the Balfour Beatty closet, and many bodies still buried. With so many staff heading out the door to rivals and taking their secrets with them, it's going to make the business of finding them and fixing the company daunting whatever degree of past experience Leo has."

The most recent "skeleton" was a £70m shortfall in the company's accounts, outlined in January, and mainly attributed to downward revisions on forecast profits for UK construction contracts that had turned sour. This triggered a sixth profit warning in two years, and took the group's expected pre-tax losses for 2014 to more than £200m.

Mr Quinn said in January that there would be "no short-term fixes" to the litany of problems he faces at Balfour, led by those at its UK construction business, which accounts for more than half of the group's turnover and is the root of much of its poor financial performance.

Mr Quinn's two predecessors struggled to staunch the bleed at the UK construction unit that, among other things, is converting the 2012 Olympic stadium in east London into West Ham United's new football ground.

A review of 127 of the UK business' projects by KPMG, commissioned by Balfour, found the unit tendered for projects at "very low margins", and then poorly managed its contracts. Over the next two years, Mr Quinn will supervise Balfour's exit from a series of lossmaking UK contracts, and this highlights how the turnround will not be quick.

Those familiar with his plans say he intends to cut Balfour's 20,000-strong British workforce by more than 10 per cent, with a focus on "removing duplication". The majority of those job losses will come from support departments such as communications, marketing and information technology.

Balfour's dividend policy is under review, after the group cancelled a £200m share buy-back in January.

Mr Quinn is digging in for a long haul. He has indicated he would not welcome any further attempts to buy Balfour or parts of the group. Last August, Carillion, another UK construction group, abandoned efforts to take over Balfour after three bids were rejected. In December, Balfour rejected a bid by John Laing Infrastructure Fund, an infrastructure financier, for its investment arm.

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He also wants to expand Balfour's support services division - responsible for infrastructure maintenance, including roads - because it also offers a steady, multiyear revenue source. Meanwhile, throughout its troubles, Balfour has retained its position as the world's largest rail engineering contractor.

Anthony Codling, analyst at Jefferies, says the market has "a lot of faith in Leo" but there are some issues that even he cannot resolve. "Balfour is not yet out of the woods in terms of profit warnings, and there is still a chance that 2015 may contain another nasty surprise," he adds.

Mr Quinn has mused that an internal "conspiracy of optimism" hastened Balfour's decline as management was in denial about problems building up in the group. The hope will be that as his turnround plan picks up pace, the mindset that came to define Balfour will not endure.

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