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Obrascon Huarte Lain’s (OHL) [BME:OHL] past divestiture and potential regulatory risk could make its current sale process an uphill battle to find a buyer, said two sector bankers, two sector lawyers and an infrastructure investor.

The Spanish construction company continues to work with Lazard on its strategic options, including a sale, the local press reported last month. However, it was also reported that the mandate is to pursue divestitures and restructuring.

The Madrid-based company has been tacitly for sale for a long time, said the first sector lawyer, both sector bankers and the infrastructure investor. “Nothing seems to happen,” said the first sector lawyer.

Rumours of a sale date back at least to 2015, when OHL was said to have received an approach from HNA Group while the builder was preparing an EUR 1bn rights issue. In September 2017, the local press ran rumours of talks with China State Construction Engineering Corporation (CSEC) [SHA:601668].

OHL’s decision to sell its infrastructure arm and concentrate on construction makes a sale much harder to execute, said the first sector lawyer and both sector bankers. The company announced plans to sell OHL Concesiones to IFM Investors of Australia for EUR 2.775bn in October 2017 and the deal completed in April.

On completion of the deal, OHL announced a new business plan, focusing on construction and concession development in the US, Latin America and Europe. It has slashed its overhead costs and its debt, leaving it with a net cash position of EUR 787m at the end of March.

The business that is left is the most difficult part of the former group to sell, said the first lawyer. Although there is little debt, there is also little profit, said the first sector banker, adding that the cashflow is unstable.

In the first half of the year, OHL had a negative EBITDA of EUR 113.2m following an unfavourable decision by an arbitrator on delays to the Xacbal Delta Hydropower Plant. Other factors included “practically nil EBITDA” in construction, delays in seeing the benefits of cost savings and a redundancy package.

The situation is “very complicated,” said the first banker, adding that OHL’s heavy construction business has low margins, which can at times be negative. The group used to use the income from concessions to offset construction risk, the banker added.

In the first six months of the year, construction accounted for 82% of OHL’s sales of EUR 1.59bn. Its industrial business accounted for 8.1%, while services accounted for 6.8%.

The big question is who, if anyone, wants to buy the business, said the first sector banker. It has been offered to Chinese bidders in the past, but no deal emerged, this banker said.

There have been lots of rumours about interest from China, said the second sector banker, adding that it isn’t clear that a deal can be done due to the company's new focus on construction. If OHL isn’t sold, one option would be to sell the small services division, this banker said.

At least one Chinese company is closing a deal to buy a family-controlled builder in Spain, said a source familiar with the situation. However, the target is unlisted and smaller than OHL, this source said.

OHL’s large business in the US could be a significant hurdle to a deal, said a third and fourth sector bankers and a third sector lawyer. At the end of June, the US business accounted for 38.5% of OHL’s short-term order book of EUR 5.58bn (EUR 2.15bn).

President Donald Trump signed in the Foreign Investment Risk Review Modernization Act (FIRRMA) in August. The new law provides the first update to the Committee on Foreign Investment in the United States (CFIUS) review process in a decade.

In the current climate, Chinese buyers should ask CFIUS to review all deals which have US operations, said the third sector lawyer. If GVM wants to sell OHL to a Chinese buyer, it should consider selling off the US business first, this lawyer said.

Any OHL projects in the US related to local infrastructure or government agencies would be sufficient for CFIUS to block a deal, the third lawyer said. OHL’s projects in the US include the I-405 upgrade in Orange County and a tunnel rehabilitation in New York.

CSCEC is actively seeking builders in North Africa and Europe, said the third sector banker. It has run into political difficulties before and needs to buy local firms, this banker said, adding that its status as a state-run company can cause problems in the US.

As state-backed firms, CSCEC and China Communications Construction Company [CCCC; HKG: 1800] would have the firepower to buy OHL, said the fourth sector banker, adding that both would face significant regulatory risks in the US. OHL is capitalized at just EUR 305m, with its shares trading at EUR 1.05, close to its 52-week low of EUR 0.95.

As well as the regulatory risks, Chinese buyers have found it difficult to buy builders, due to conflicts over intellectual property, industry standards and labour issues, said a source familiar with the situation. This hasn’t stopped local players from looking for deals, this source added.

HNA is probably less likely to buy OHL than its peers, said the fourth sector banker.

A sale by GVM was flagged as a viable option by this news service in June. Other options were said to include a dilutive merger with another player and simplifying the group structure by making GVM the listed entity instead of its affiliate. GVM subsequently reduced its stake in OHL to 41% from 53%.

CSCEC, CCCC and HNA declined to comment. OHL and Lazard also declined to comment.