Balfour’s £3bn mega-merger plan left in tatters as shares sink by 7 per cent
Thursday 21 August 2014
A £3bn mega-merger between two of the UK’s biggest builders was in tatters yesterday after Balfour Beatty refused a third improved proposal from its smaller rival Carillion.
Balfour refused to extend today’s “put up or shut up” deadline to agree a deal, despite its shareholders being offered a bigger share in the combined company. The tie-up would have created a £14bn construction giant with a heritage of projects including the Channel Tunnel and the Thames Gateway.
But Carillion said it was “no longer pursuing” a merger after Balfour, led by its executive chairman Steve Marshall, maintained its opposition to a deal. Shares in Balfour sank nearly 7 per cent, or 17.1p, to 238.9p. Balfour – left vulnerable to a bid after a string of profit warnings and the sacking of its chief executive – began talks on a friendly deal in July. But Mr Marshall pulled the plug three weeks ago, after a U-turn from Carillion on the fate of Parsons Brinckerhoff, the profitable US subsidiary which Balfour is selling but Carillion now wants to keep.
Carillion, which argued it could find at least £175m a year in savings through a deal, tabled a third proposal, offering 58.27 per cent of the shares in a combined business earlier this week. This added an extra £200m to the value of Balfour, the amount that it is promising to return to its shareholders through the sale of Brinckerhoff. But Balfour insists Carillion had failed to address the “considerable risks” of combining the companies, and attacked plans to drastically shrink the UK construction business, with a potential recovery in the offing.
The board “unanimously” rejected the deal and is concentrating on a stand-alone strategy of focusing the business on US and UK markets, as well as exploring other “value-creating opportunities”, such as the potential sale of its £1bn-plus portfolio of PFI investments.
Balfour is also hunting for a new chief executive, as well as a cost-cutting programme of its own, which is likely to involve significant job cuts. It said: “The board will also remain open to strategic value creating opportunities across the group while it concentrates on the restoration of value to its shareholders.”
Carillion has been forced to retreat for now, despite Standard Life Investments – a shareholder in both companies – declaring in favour of a merger this week.
However, Balfour could come under pressure from investors to resume merger talks if its rival is still interested in a deal once the future of Parsons Brinckerhoff is resolved.
Gregor Kuglitsch, an analyst at UBS, said: “We believe Carillion has little choice but to walk away, and that it has no option to go hostile. On that basis, Carillion will have no ability to bid for six months unless it receives a Balfour recommendation or a third-party bid emerges.”
Joe Brent, at Liberum, said: “The saga has reminded the market of the value potential within Balfour Beatty… the bigger prize remains to improve construction margins from zero into a recovery.”
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