Published in the October 2010 Contractor Magazine

Despite some impressions to the contrary, the handover of power atop Leighton Holdings seems to have been well planned.

The company has been grooming Stewart for the top job for more than a year, promoting him to Leighton co-chief operating officer in 2009. In his co-COO role Stewart was responsible for Leighton’s international business, John Holland and Leighton Properties.

Leighton has told the market that it started the succession process more than two years ago.

One of the real tests of how successfully it has managed the changeover will be to watch the exits at the company and see if any of those who had been vying for the top job jump ship.

In a teleconference with investors following the announcement that Stewart would become CEO from January 1, Leighton chairman David Mortimer said the company had considered seeking an external replacement.

He said, however, that the company had decided the risk of such a move would outweigh any benefits the company would gain.

That and the fact that Leighton felt it had a wealth of talent to tap internally.

In the lead-up to the announcement though, there was certainly speculation that the changeover was not exactly to the incumbent’s liking.

CEO Wal King probably helped fan the flames a bit through his feuding with both the Leighton board and that of Leighton’s largest shareholder Hochtief. It certainly seemed his departure from the CEO’s role was not exactly of his choosing.

If this is true and some conspiracy theories prove correct, then he may have the last laugh. King is close to the management of Spanish construction giant Actividades de Construccion y Servicios. ACS launched a bid for Hochtief just days after King’s successor was announced.

Could King come back to the top Leighton job that way or to a role overseeing it? It would make for an intriguing twist in the tale but is not likely to happen.

The ACS bid for Hochtief, which is not due to kick off until November, is pitched below Hochtief’s share price at the moment. It seems more aimed at getting past the 30% shareholding rule in Hochtief’s native Germany. Crudely speaking, anyone wanting to increase their shareholding past 30% in a Germany-listed company must make a formal takeover offer. ACS has done that.

On the home front though it seems it will be business as usual at Leighton.

Stewart is certainly seen as a safe option. He is a 24-year veteran of the company who has come very much from the operational side of the business – not a bad background for an engineering company.

He is a civil engineer with 35 years experience who has managed operations throughout Australia and Southeast Asia in the construction and mining industry.

Stewart has been involved in some of the key decisions Leighton has taken recently and will be hewing closely to the plan King put to the board three years ago.

Leighton chairman David Mortimer said Stewart would “carry that [plan] forward”

“No doubt over time there will be a change here and a change there but the broad strategy will be implemented,” he said.

Stewart himself said in the investors’ teleconference that he would not be straying from the script.

“I’m committed to the same strategies Leighton is committed to,” he said.

Those are diversity of geography, diversity of market, diversity of brand and diversity of delivery systems.

“Wal leaves the company with a fantastic legacy,” Stewart said. “We have extraordinary opportunities going forward across our operations.”

The picture also is looking pretty good in the present for the construction and mining contracting giant.

It is the world’s largest contract miner and one of the largest construction companies. According to Engineering News Record it is the 12th largest contractor by revenue in the world.

Leighton has $42 billion worth of work in hand and a sizeable chunk – about $4.5 billion – in the winnable category.

There have been a couple of shadows on that horizon in the mining sphere. The impact of the federal government’s proposed Minerals Resource Rent Tax for one.

The other is the possible fallout from the proposed BHP Billiton-Rio Tinto merger in Western Australia’s Pilbara. If that merger goes ahead, BHP has said it would look at being an owner-operator of its mines rather than hiring in contractors.

JP Morgan analyst Alistair Reid said the move to owner operating would only affect BHP’s Pilbara iron ore business – and only ifthe JV went ahead. It would not, he said, cause any changes to the mining giant’s coal business, where Leighton holds critical mining contracts.

“Plus there are break clauses,” Reid said. “The earliest rollout would not occur before 2013.”

One factor of the succession plan likely to win Leighton some kudos from a corporate governance point of view is the fact that King does not gain a board seat.

That has been the case with some other companies and it can pose real problems for those who take on the CEO’s role.

Imagine the replacement’s plans to review decisions past management has made. How easy would that be with the head of the previous management looking down from a board seat on high?

Leighton has, however, wisely retained King’s experience and insights through a consultancy arrangement.

King, for his part, said he had a vested interest in the continued success of theLeighton business because he had “created such a far-reaching, successful organisation”

“It’s been a remarkable journey from 1968 when I started in the company,” he said.

By the time King became CEO in 1987, Leighton was a mid-tier Australian company.

It had a profit back then of $7 million on the back of $1.3 billion in revenue.

From there it has leapt to a $612 million profit from 18.6 billion worth of revenue.

When King took up the CEO’s role in 1987 Leighton had a market capitalisation of $85 million. It boasted a capitalisation of more than $10 billion in 2010.

“The company has great momentum,” he said.

“We came through the GFC [global financial crisis] with a few tail feathers singed but we’re poised to continue to grow.”

Analysts certainly view Stewart as a safe, competent replacement for King.

“Dave Stewart, we view, as a fairly safe pair of hands,” Reid said.

“He’s a 24-year veteran [of Leighton] and has spent the past year as a group executive. That was his working audition.

“Wal’s succession was probably one of the worst-kept secrets in Australia.”

Of course Stewart has been left with very large shoes to fill.

There is a saying in Australian rules football that it is better to be the coach that replaces the coach who replaced the legend. Essendon fans well know the example of Matthew Knights who was sacked this year after his three years in the shadow of Kevin Sheedy.

Whether that will apply to Stewart remains to be seen.

Things certainly are heading in the right direction for him and Leighton seems to have the momentum it will need to get its share price back on track.

King has been coy about what his future holds after he leaves the company he has been with for 42 years.

He has the stated ambition of reaching 1 million vertical miles in heli-skiing but expects to make that milestone in January. Plus, he said, there will be some boards.

David Stewart’s career highlights

• Appointed to the position of chief operating officer at Leighton Holdings in 2009 and responsible for John Holland, Al Habtoor Leighton Group and Leighton Properties;
• Appointed John Holland group managing director in 2006. Had spent three years heading the company’s construction business – John Holland Construction;
• Employed in senior roles at John Holland since 2000 and joined the Leighton Group of companies in 1985;
• Field experience covers project management and engineering roles throughout Australia and Asia, including the Sydney Harbour Tunnel Marine Works contract and underground mining, bridge construction, water treatment plants, tunnelling and marine works;
• In 1991, appointed Thiess Contractors marine and underground division area manager, responsible for operations throughout Australia; and
• Thiess Contractors general manager between 1993 and 2000. Initially responsible for the group’s Indonesian business, and later headed its international activities in Indonesia, Malaysia and South America.