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Is Monadelphous swooping on Service Stream?

This week’s announcement by National Broadband Network (NBN) contractor Service Stream (ASX: SSM) that it is effectively walking away from its Syntheo joint venture with partner Lend Lease (ASX: LLC) didn’t come as any surprise. Syntheo, which was formed to win contracts for the supply of services to NBN Co, has been plagued by problems for months.

Under the new agreement, Lend Lease “will control the delivery of Syntheo’s remaining obligations under its agreement with NBN Co.” Work still to be carried out covers construction of NBN-related infrastructure in Western Australia and South Australia.

While Lend Lease shareholders are unlikely to have come out unscathed from the Syntheo JV, Service Stream shareholders have certainly taken the brunt of the failure. Service Stream’s market update was accompanied by a lift in the suspension of trading in its shares, which led to the share price plummeting to an all-time low of 12 cents.

The all-time low share price looks to have attracted the interest of Mondelphous Group (ASX: MND). A report in the Australian Financial Review suggests that Monadelphous has approached Service Stream about purchasing a stake in the company. Monadelphous, which is often regarded as the highest quality listed mining service firm, is looking to diversify its revenue base away from the resource sector. It is certainly opportunistic, but Service Stream could offer Mondelphous an opportunity to snap up a discounted slice of the telecommunication and utility servicing space.

Syntheo hasn’t been the only contractor struggling with NBN contracts. Leighton Holdings (ASX: LEI) just last month bought out its partner Siemens from its Silcar JV. Silcar, which has NBN construction contracts in NSW, ACT and Queensland, is said to be facing millions of dollars in write-downs and no doubt Siemens is pleased to be done with it.

Foolish takeaway

The problems being encountered by contractors to the NBN are a reminder to investors of the razor-thin margins these types of services are usually supplied on. It is also a reminder of the potential for ‘blow-outs’ to occur in budget estimates. While Service Stream shareholders wouldn’t want to see their holding diluted at such a low price, they are no doubt pleased that there is some corporate interest in the company that could help boost the share price.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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