Costain suspended as shares plunge in frantic dealing

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Dealings in shares in the troubled Costain construction company were suspended yesterday ahead of a major refinancing package, which is likely to be announced next week and be accompanied by details of its long-awaited sale of its US mining businesses.

The news emerged after Costain's shares lost almost half their value in a frantic few minutes in early morning trading, slumping 31p to 39p before being suspended at the company's request.

In a statement to the Stock Exchange, Costain admitted it would be unable to meet Friday's deadline for the publication of its 1995 results. A further announcement about significant corporate developments would be made shortly, Costain added.

Costain is in advanced talks with a potential buyer for its US. mining unit, according to sources close to the building company. Its 1995 results, which are expected to show a loss of about pounds 40m, are unlikely to be published until the mining sale is completed because a write-down is likely against group earnings.

The disposal could raise about pounds 45m, some pounds 5m below the US mining unit's estimated book value. "Anything less could disappoint the market", said one analyst.

Costain is also understood to be lining up at least one outside investor linked to its core building and civil engineering interests who would take a sizeable equity stake in the group. The move is designed to stiffen Costain's capital base and reduce an pounds 80m debt burden, which equates to about 90 per cent of shareholders' funds.

"We have needed to strengthen the balance sheet for some time," a source close to the company said last night.

"We have always sought to keep Costain's identity and now we want to reinforce it with new money." Costain has sold UK housing and commercial property interests as well as a large part of its coal mining business to reduce debts. But analysts say the group's prospects hinge on a successful disposal of its remaining US coal businesses.

The need for a fresh capital injection was underlined yesterday when IBCA, the European credit rating agency, placed Costain's rating under review with negative implications.

"Following two profit warnings since the start of 1996, the equity base of the group is clearly under pressure and relies heavily on the support afforded by the accounting treatment of its pension fund prepayment" the agency said.

IBCA said Costain had been successful in winning new contracts recently and this should be beneficial to its cash position, as trade creditors expand, if not its profits.

"However, it would make the Government's choice of Costain as the contractor for the high-profile Newbury by-pass contract seem unwise were Costain's financial predicament to worsen."

Costain courted controversy earlier this month when it was awarded the pounds 73.8m Newbury by-pass contract. Within hours of the news being announced in Parliament some 25 anti-roads protesters blockaded Costain's offices in nearby Maidenhead.

A fortnight earlier Alan Lovell, Costain' chief executive, had endured demonstrators with banners on the lawn of his home in Winchester after it emerged Costain was favourite to clinch the contract.

Costain is also one of several contractors embroiled in a protracted legal battle with Eurotunnel over work done on Channel Tunnel.

Shares in Costain have been one of the worst stock market investments in the past decade. At its peak in 1987 Costain enjoyed a stock market value of almost pounds 1.7bn; at yesterday's suspension price the company was worth just pounds 20.2m.

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