Cammell left high and dry

It was a risky decision to borrow £50m to secure the biggest ever cruise ship conversion. Then when Costa Crociere suddenly pulled out, it all went wrong…


The future appeared bright for the west bank of the Mersey on 23 November last year, as the Cammell Laird shipyard awaited the arrival of the cruise ship Costa Classica from the Italian riviera.


A huge newly built 26,000-tonne midsection stood dominating the resurgent UK shipbuilding group’s Birkenhead yard, ready to lengthen the luxury Italian vessel by 45m.


The 700-strong workforce at Cammell Laird, whose past glories include building the UK’s largest ever warship the Ark Royal in 1960, were primed to cut the incoming 57,000 tonne cruise ship in two and fit the 12-deck extension. The £34m ‘jumbo-isation’ contract for operator Costa Crociere and its US cruise giant owner Carnival was set to be the world’s biggest ever cruise ship conversion that would herald the return of shipbuilding to the Mersey.


But when at 3pm that afternoon the Classica was suddenly ordered to turn around off northern Spain and head home to Genoa, the Birkenhead yard found itself stuck with a steel midsection badly in need of a bow and stern.


Costa Crociere pulled out of the deal on the grounds that the mid-section was ‘incomplete’. The last-minute decision not to proceed with the conversion also exposed Cammell Laird’s risky decision to borrow £50m to win and finance the vital contract.


Over the last four months the London Stock Exchange-listed shipyard group has seen share prices lurch into free fall from a high last year of 141.5p to its present resting point of around 5.5p. On 15 April Cammell Laird is expected to default on the first e7.5m payment due on a 12% e125m bond issue taken out last autumn to finance its ambitious expansion programme.


The beleaguered group also looks set to default on its £50m overdraft with the Royal Bank of Scotland if it does not receive payment for the Costa Classica by the group’s year end on 30 April.


The tragedy is that these difficulties threaten to drag down a healthy company with strong orders. Troubles compounded early this year when the government turned down Cammell Laird’s bid with Maersk for a share of the £1bn Ministry of Defence ferry contract. The Birkenhead yard aimed to clinch at least four of the six ferries ordered by the MoD, but a rival bid won four of the vessels for Germany’s Flensburger yard, with the remaining two placed at struggling Belfast yard Harland & Wolff.


The government’s justification of ‘commercial reasons’ for a last minute switch of work across the Irish Sea was widely read as highly political.


AEEU regional officer Ted Gilbertson says: ‘The irony is that Birkenhead was passed over in favour of Belfast because Cammell’s order books were bulging and it looked healthy enough not to be damaged by the decision.’


Hopes pinned on a lifeline £344m deal to build two luxury 28,000 gross tonnage cruise ships for US start-up consortium Luxus also look unlikely, with cash-strapped Cammell Laird unable to secure the government backing it needs to clinch the deal.In January, the Department of Trade and Industry lowered from $250m to $150m the refund guarantee the group needed to find to win government support for the deal.


The DTI claims this is the highest level of risk-sharing ever offered by the UK government. The DTI has also agreed to provide 9% shipbuilding intervention funding.


Cammell’s orporate development director Brett Martin says the group has offered to reduce government financial risk by building just one ship, with a second as an option up to 18 months later, rather than the previous two-ship order with a six-month gap. But with a general election looming, the government is unlikely to want to get embroiled in a potentially risky industrial venture.


The turnaround in fortunes took its toll in January on chief executive John Stafford, who resigned five years after he bought the Birkenhead north yard from VSEL and acquired the rights to the historic UK shipbuilding name. Stafford had an ambitious vision of expansion, developing a north-east presence with the purchase of Wear Dockyard and Tyne Dock Engineering, and securing the group’s first overseas foothold with the purchase of the Gibraltar Shipyard in 1997.


Expansion continued last July when Cammell Laird took a 49% stake in Cascade General of Portland, Oregon, which operates one of the US’s largest floating docks. Two months later, the group secured a 20-year exclusive lease on three docks at Marseilles and the biggest facility of its kind in Europe.


Now John Schofield has taken over as acting chief executive and with Martin has launched a strategic review due to report at the end of the month. This is set to consolidate the group after its rapid growth into the UK’s leading ship repairer and conversion expert.


Financial adviser Close Brothers and its US partner Houlihan Lokey, which has close links with Cammell Laird’s bondholders, have been appointed to examine how to restructure the company, considering options including ‘the raising of finance and the possible restructuring of principal and interest on Cammell Laird’s bonds’. Cammell Laird will not disappear, but Close Brothers will call the shots, and could press for the group to be split into individual yards.


Brett explains: ‘John Stafford was a visionary who was instrumental in growing the business, but post-Costa we have to start getting the best value out of what we’ve got, make our assets sweat and ramp up our sales in our core market.’


The company is actually fully occupied. Group operations manager John Syvret says: ‘There is all this talk of crisis, but the yards are very busy with repair and conversion work and we’re having to turn customers away.’ At Birkenhead, orders include a four-month, £10m upgrade of the support ship RFA Argus into a casualty reception ship, with a new hospital in the lower deck and the main flight deck modified to take more helicopters.


Martin sees the future rooted in ship repair and conversion work. He believes the group can grab a $200m to $300m slice of the world conversion market. He says: ‘We’re among the top five in our niche in the world, and to look for a 1% cut of that market is hardly unreasonable.’ Ship repair and conversion might be the group’s bread and butter work, but talk in the yard and among management still returns to clinching a big build.


Top of the list is the construction of the hulls for two new Royal Navy aircraft carriers, which BAE Systems and Thales are competing to build and design, to enter service by 2015.


Cammell Laird is negotiating with Harland & Wolff in Belfast on sharing work to help build the 40,000-tonne carriers. Managers and workers hold up the Peregrine VII deepwater drillship conversion completed in 1999 for Houston-based R&B Falcon as an example of what the yard can achieve.


Meanwhile, as the Costa Classica midsection rusts in the Birkenhead yard, lawyers for Cammell Laird and Carnival are fighting over the definition of ‘completion’. Costa Crociere alleges that there were ‘heavy delays on the project and defective work’.


Production director John Kennedy says: ‘If you are going to cut a boat in two and add a luxury mid-section, you are not going to do all the finishing and outside paintwork until the units have been joined.’ Wired up and ready for finishing work, the cabins have shower and bathroom units already plumbed in, while winches erected to install marble fittings now sit idle.


Kennedy rejects claims that work was not up to scratch. He points to three independent reports that found the mid-section up to specification, quality and timeliness.


‘We could go on forever arguing about what was or wasn’t done,’ says Martin. ‘The basic matter for us is that whatever went on at Costa was an economic and not a technical decision.’ Cammell Laird managers and unions agree that Carnival’s purchase of UK tour operator Airtours’ joint share in the Costa Crociere vessels marked the beginning of a collapse in a previously good working relationship.A contract option on a second boat, to extend the sister ship the Costa Romantica by 45m, was also cancelled following the buyout of Airtours.


The yard’s senior GMB steward Dave Hulse says: ‘Why did they sail the ship from Genoa if they believed that the body section wasn’t up to standard?’ Cammell Laird has filed for dissolution of the contract. Both sides have nominated arbitrators, with a third to be appointed.


Industry insiders argue that the Carnival empire has the economic clout to carry out new building within its own group. It has the resources to ditch the deal with Cammell Laird and go through costly and lengthy arbitration.


Martin says finishing the job would be difficult ‘considering the history’, with options restricted to an out of court settlement or the sale of the mid-body to a third party for completion.


Would Cammell put money up front to secure a contract again? ‘It’s easy with hindsight to look at unexpected events’, says Martin. ‘No, we wouldn’t approach a deal in that form again.’


Cammell’s busy yards


Other work in Birkenhead this year has included the £500,000 dry-docking of the P&O passenger ferry European Navigator using a new sandwich plate system. Decks were blasted and then covered with new plates, with a 20mm air gap left for epoxy resin to be injected in to give the deck extra strength.


In March the Ministry of Defence awarded a dry-docking and refurbishment contract for the 1993-built Royal Fleet Auxiliary oil replenishment vessel Fort George to the group’s Hebburn yard on South Tynseside.


Six vessels are under repair and conversion on Teesside, including the conversion of oil well production vessel Crystal Ocean for Brovig, while half a dozen contracts at Tyneside are under way, with the construction of Torghatten Trafikkselskap for a Norwegian company nearing completion.


In Europe, Cammell Laird yards are busy with four ships owned by SNCM docked in Marseilles, while in Gibraltar work is under way on five different ships.