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Boom times are driving these S&P/ASX 200 businesses to bust

Gone Bust

The Downer EDI Limited (ASX: DOW) share price tumbled today as management denied rumours that it has not received a management buyout proposal for its troubled mining services business although that isn’t likely to quell the speculation.

It’s almost a clever sleight of hand as the engineering group didn’t say it did not receive any takeover proposal.

That may be missed by the market as Downer’s share price crashed 2.8% to $6.70 when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) shed 1.6% of its value in the last hour of trade today.

Downer is reported to have hired Deutsche Bank to help it negotiate the sale of its mining business to an overseas trade buyer, according to the Australian Financial Review.

It’s hard to think that the leading mining services business can be losing money during this part of the cycle when miners are ramping up production but that’s what’s been happening as Downer has seen earnings from this division slide backward by 40%.

The loss of two big contracts contributed to the profit drop and prompted management to state that it would merge the mining services business with its engineering operations.

It’s probably better to sell the business given that other parts of Downer’s business are performing well.

Lendlease Group (ASX: LLC) is likely to be keeping a close eye on the divestment as it mulls the future of its engineering business.

It beggars belief that Lendlease could be losing money too during a boom although its problems are in the infrastructure construction sector with the group shocking the market by saying it would take a $350 million after-tax hit on a small number of projects.

The Lendlease share price has crashed 27% since the news and some experts believe the only way the diversified engineering and property group can win back investors is by surgically removing the engineering services division.

The worrying thing is that these may not be the only companies struggling to make hay even when the sun is shining.

RCR Tomlinson Limited (ASX: RCR) shares have gone into a trading suspension as management reviews its earnings for FY19 and “the associated consequences for its funding”.

No other details have been announced just yet, but you can bet they will be ugly.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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