Stories
2018 was a bellwether year for L&M Keating and its founder Louis Keating. Having carved out a niche in the lucrative marine engineering sector, the Clare-based building company was riding the crest of a financial wave.
Earnings and profits were growing strongly, and its pipeline of future business was expanding. A joint venture with Roadbridge, the Irish civil engineering company, had been especially profitable, with the business winning a €100 million framework contract to provide services to the Dublin Port company.
All told, the company increased revenues from €67 million in 2017 to €69.5 million, while pre-tax profits swelled from a handsome €4.7 million to an even healthier €5.2 million.
The business, which still had an active housebuilding wing in Munster, was also expanding into the UK, and weighing up a potential move into other jurisdictions. The company’s success did not go unnoticed.
Impressed by its growing presence in the marine sector and its list of blue-chip customers, CBD Capital, a Dublin-based private equity fund led by Jim Murphy and Liam Dowd, stepped in and acquired the business.
Under the deal, CBD bought a 77.5 per cent stake, with Keating receiving an initial bullet payment followed by a series of deferred earn-out payments over the next three years, plus a payment from surplus cash.
Keating remained with the company, but a new CEO, Gordon O’Regan, was recruited to grow the business, which was rebranded as Keating Construction. The plan was to increase revenues to €150 million within five years.
CBD saw the acquisition as a platform to specialise in marine engineering and diversify into higher-margin UK and European markets.
Things were progressing so smoothly that in early 2019, the company even funded the buyout of the remaining 22.5 per cent owned by Keating.
Just two years later, however, it is battling for its survival while the future for its 150 staff is in doubt. Last week, the company petitioned the High Court to appoint an examiner over the business, a move designed to give it bankruptcy protection from its growing list of creditors and provide time to restructure both its operations and its balance sheet.
A related company called Kilmihil Rental Store, a specialist plant and equipment company, also sought court protection.
The move came just in time. Documents seen by The Currency reveal that four creditors have issued winding up petitions against the company on foot of debts. These include O’Sullivan Fabrications, which is owed €417,000 and mercury Engineering, which is owned €150,000.
Meanwhile, a judgement has been registered in Britain against the company for €92,000.
The fall from grace has been both remarkable and swift. Following its bumper profits, it fell to a loss of €8.1 million last year, and lost a further €2.9 million in the first eight months of this year.
Having been acquired by private equity just two years ago in a big-ticket deal, documents reveal that the company will leave behind debts of more than €30 million if it the examiner, KPMG accountant Kieran Wallace, fails to steer it through the examinership period successfully.
An independent expert report prepared by Stephen Scott, a director of Smith & Williamson, reveals just what went wrong in such a short space of time, and unveils the true scale of its financial issues.
It shows how the company has a been hit by Covid-19 and losses from legacy contracts, while the various payments to Keating burned its cash reserves.
This is the story of how Keating Construction, one of the top 50 construction firms in the country, came unstuck.
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Founded in 1987 by Louis Keating, the company began as a housebuilder in Munster. However, in recent years, it has moved into marine services, working on ports, piers and various waterfront projects.
The entire shareholding of both Keating Construction and Kilmihil Rental Store is held by CBD through a series of interrelated companies.
In addition to the group structure above, Keating entered into a joint venture with Roadbridge in 2016 and, since then, has successfully been awarded three framework contracts totalling €380 million. This has been the largest expenditure in marine infrastructural development in Ireland in recent times and accounts for more than 50 per cent of the marine-related construction activity over the same period.
The contracts were significant. The JV with Roadbridge was highly profitable, and Keating, due to its marine expertise, carried out the majority of the work on the Dublin Port job and reaped much of the profits
In late 2018, it also won the first element of a new €80 million dredging framework contract with Dublin Port. This award was followed in early 2019 by a further successful tender for a €200 million Framework 2 contract with the semi-state.
More contracts were expected to follow. According to the independent report by Scott: “Importantly, Dublin Port Company (“DPC”) are on a 10-year Masterplan whereby they intend spending in excess of €1 billion on developing the aged facility in the Dublin Docklands and it is their desire to do so through Framework Agreements. This provides the JV a significant platform that would enable Keating’s 5-year growth strategy to be realised as well as providing an established arena for training and development.”
So, just what went wrong?
Fall from grace
According to the expert report, there are four main reasons for the company’s financial problems:
- Loss-making contracts;
- Cessation of works as a result of the Covid-19 pandemic;
- Sale of the companies and associated consideration payments; and
- The challenges associated with the transition from the previous ownership, operational and management structure to a new operating model appropriate for the size and strategy of the business.
The report explains the various issues around loss-making contracts, outlining how “unforeseen legacy issues and other risks have materialised in respect of a number of the key contracts”.
These include the Dinish Wharf Expansion Programme in Cork, which generated a loss of €4.6 million due to unreasonably inclement weather, the redesign of certain work and changes in geophysical conditions.
A further loss of €3 million was booked from a project at Greenore, with the company suffering from restricted site access and the collapse of an old Victorian wall. A further loss of €500,000 came from a dredging contract at Dublin Port.
Covid-19 also hit the company hard due to site closures and the lack of new tender opportunities. “Arising from public health measures introduced in March 2020, the Companies ceased operations on all of their projects for three months in order to protect the public and its employees. The Companies have since begun to restart certain projects, where appropriate, on a phased basis,” according to the Scott report.
Scott added: “The ceasing of the Companies’ operations and the slow pace at which they are beginning to restart certain projects has caused a substantial slowdown in cash payments from their clients. This has had the impact of severely depleting LMK’s cash balance of €7.6m in January 2020 to €1m in June 2020.
“In response to Covid-19 restrictions, the Companies implemented a number of costs-saving measures, including placing employees on temporary lay-off, offering a redundancy scheme and attempting to negotiate sums due to contract counterparties on key projects.”
The structure of the private equity buyout also had an impact. “CBD acquired the Companies over the course of 2018 and 2019. The net result of the sales transaction was that the Companies’ cash reserves and working capital were reduced by virtue of the terms of the sale which resulted, in addition to other amounts, in approx. €5.5 million of cash being extracted from the Company,” according to the report.
“Management have been managing working capital as efficiently as possible, however, cash constraints have affected the operational effectiveness of the business. To assist its ongoing operations, CBD provided further funding in February 2020 to LMK by way of a €1,500,000 long-term interest-free loan.”
There were also issues relating to the change of ownership from an operating perspective with the report stating that “the business previously operated through a command and control structure and not have a senior management team”.
“The culture of the business was typical of many indigenous owner-managed businesses. Although current management have made significant progress in addressing these deficiencies, we understand the transition to the new structure posed challenges,” according to the report.
As the losses mounted, the company faced significant issues with creditors. In addition to O’Sullivan Fabrications and Mercury, both Large Diameter Drilling and Senator Windows also lodged winding up petitions against the company.
In order to attempt to keep the companies trading, management took a number of actions over the past few months including:
- Cash input from shareholders of €1.5 million;
- Attempts to renegotiate contract terms;
- Headcount reductions through temporary layoff and redundancy;
- Salary reductions for all remaining staff;
- Access to the Temporary Wage Subsidy Scheme;
- Negotiation and suspension of finance loan arrangements.
It was not enough, however. Faced with not being able to pay its bills as they fell due, the company moved to appoint Wallace as examiner.
Future viability
The company has prepared a series of forecasts that show a positive outlook if it can survive the next 100 days. It expects to return to profit next year with a €1.5 million pre-tax profit. This will then rise to €3 million in 2022 and €4.6 million in 2023. By 2026, it expects to be recording a profit of €10.2 million.
Over the same period, it expects revenues to rise from €77.4 million next year to €150 million in 2025.
According to the report: “FY22 is forecasting 18% YOY growth to €91.3m. 27.5% (€25.1m) is from anticipated work under the current frameworks Keating is party to. 47% (€43m) would come from the historical conversion rate referenced above of the tracked pipeline of €217m of FY22. The remaining balance of c 25.5% is forecast to come from new pipeline that arises in the next 18 months across Ireland, UK and an emphasis on western Europe.
“Management acknowledge that FY23 – FY25 are more difficult to project as the pipeline of work is unknown 3 years out. Despite this, they have forecast based on the previous results and the future projections of FY21 & FY22.” Meanwhile, the report says that the company’s current UK and Ireland tracked pipeline is in excess of €1 billion.
“This comprises in excess of 65 individual projects with more than 35 of these being greater than €10m in value. Management’s visibility of pipeline does not extend beyond 3 years. These figures are prior to management completing their research on the European Market. LMK have been recently appointed to the ‘Accelerated Growth’ path within Enterprise Ireland, ensuring they have the maximum support regarding market research, relationship development and management,” according to the report.
“Management have identified significant future growth opportunities in relation to the marine engineering element of their business. LMK are currently one of the leading specialist marine contractors in Ireland, holding c.35% of the market share. Management have forecasted an average growth rate of c.12.5% per annum over the next 5 years.”
In an appendix, the report adds: “Management have forecast €275m turnover over a 3-year period. This equates to a win rate of almost 25%. This is against an historical backdrop of Keating’s recording a conversion rate on tenders of approx. 28.5%. This pipeline does not take into account the European market which Management believe will only improve to the above ratios and statistics from the Companies’ perspectives.”
What is driving this growth? The first is the weather, with the company confident that climate change will drive increased activity in four key areas:
- Defences against rising sea levels;
- Protection against coastal erosion;
- Flood relief protection;
- Water-related energy.
With its strong market position, it expects to benefit from those trends. It also believes it can do well from Brexit.
“The UK Government have announced the targeted fast-tracking of the construction/upgrade of 10 free ports. This will see a considerable amount of increased activity for approx. 5 years. Coupled with this, other ageing port facilities will be upgraded. LMK won two recent contracts in the UK which will strengthen its presence in this market,” the report states.
According to the report, the company has been approached by a number of trade players about potentially investing.
“Whilst no firm commitments have been made, we have been advised all parties saw the relevance of the organization and in particular the 5-year business plan. However, greater stability and certainty of future prospects was and is required,” Scott states.
“In addition, there have been soundings from other non-trade investors or intermediaries. Such parties have expressed interest in exploring an investment in the business, as they are attracted by its specialism in marine and its multi-faceted international growth potential around climate change and renewable energy. This ‘green agenda’ is of particular interest to long-term investors, such as very high net worth individuals. Again, as with potential trade investors, such parties will only engage in a meaningful way once stability has been reestablished to the business and a credible strategic plan is in place.”
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In his conclusion, Scott determines that the creditors would be better served through an examinership process, rather than liquidation, where they would be left nursing losses of more than €30 million. However, he says the examiner will have to source new investment and cut deals with creditors.
To survive, Scott says Keating Construction must also retain its key contracts such as its JV in Dublin Port, and complete its transition from an owner-operator model to a more management-led business.
I”n my opinion, based on the information available to me at this time and subject to the conditions outlined, both of the Companies and the whole or part of their undertakings, have a reasonable prospect of survival as a going concern,” he says.
The company’s 150 employees will be hoping that he is right.
