German engineering and construction services firm Bilfinger recently issued its fifth straight profit warning, and its power division, which builds and services conventional power plants, is facing major upheaval.
But the firm isn’t considering selling the division, Handelsblatt has learned; rather it is focusing on a significant reduction in its size.
Entire areas must be restructured and reoriented, new supervisory chairman Eckhard Cordes told a shareholders' meeting.
Soon-to-depart chief executive Herbert Bodner is handing over a huge task to his successor, Per Utnegaard, who takes over on June 1. Bilfinger, based in Mannheim, has three divisions, but only its facility management sector is doing well. That division constructs, operates and maintains buildings such as shopping centers.
The industrial division, which maintains and modernizes facilities and is also involved in drilling for oil and gas in Norway and the United States, is barely profitable. The power division is disappointing on all counts.
There is a need to make a clean sweep. They require an entirely new corporate culture. Marc Tüngler, DSW private investor association
Cevian, an investment firm with a large shareholding in Bilfinger, is putting pressure on the company. It wants to see a rise in share price over the mid-term. But that seems unlikely. “That's why there's a bit of an unsettled mood at the moment,” an insider said.
First of all, Mr. Utnegaard must tackle the failings of the power division. The situation is bad with regard to the construction and maintenance of power plants, because of the “ongoing uncertainties in energy policy,” Mr. Bodner said recently.
The disaster at Japan’s Fukushima nuclear power plant in March 2011 is causing great uncertainty in Germany’s conventional power business, as the country phases out both fossil fuel and nuclear power production. This means energy companies aren’t making new investments.
The power plant sector’s woes are hard to manage. The large size and high risk of power division projects has meant that Bilfinger has had big problems in project management. Mr. Utnegaard's short-term solution is job cuts.
Mr. Bodner said a possible option is the closure or merger of parts of the division, which employs 11,500 of Bilfinger’s 69,000 workers worldwide. Above all, German sites with a total of 3,700 employees must be scrutinized to see if they remain economically viable. The German arm of the power division has been responsible for the biggest decline because of the country’s move to renewable energy.
The second point on Mr. Utnegaard's to-do list is to re-energize the industrial division, despite the fact it has already enjoyed some success. For example, the company recently extended service contracts with Shell worth €150 million ($167.2 million). The deals are related to Europe's largest refinery in Rotterdam as well as the petrochemical site in Moerdijk, both in the Netherlands.
The low price of oil is causing problems with projects in Norway and the United States. Revenues are much less than expected. “These are not small sums,” Mr. Bodner said recently.
Service contracts can be troublesome. “Many customers have a sort of framework contract with Bilfinger for certain services that can be called for when the customer wishes,” said Marc Gabriel, an analyst at Düsseldorf-based bank Bankhaus Lampe. That is difficult to manage because employees must always be on standby.
Bilfinger also has problems of its own making with its project management business. Company sources say it has sunk many millions in the sector over the years, but has put too much faith in people who have no experience. The inside word is the supervisory (non-executive) board didn’t monitor developments closely enough.
Marc Tüngler of DSW, Germany’s largest private investor association, puts it more bluntly: Apparently, top management was no longer aware of what was happening in its business operations. “There is a need to make a clean sweep. They require an entirely new corporate culture.”
Consultants from McKinsey are looking for possibilities to make crucial improvements in project management. Mr. Utnegaard may be the man to do it. Between 2007 and this month, he was the head of Swissport International, a large provider of ground handling services to the aviation industry. The firm is active in 45 countries.
During Mr. Utnegaard’s term, Swissport became the leader in its field and embarked upon a “remarkable” course of growth, as stated in a notice from Bilfinger.
The restructuring, however, will be long and painful, something that doesn’t seem to shock Mr. Utnegaard. “I am enthusiastic. There is much to do,” he said.