Balfour and Carillion in talks to create £3bn construction giant

Balfour Beatty and Carillion are in merger talks that could create a £3bn blue-chip construction giant.

The companies behind the London Olympics Aquatics Centre and the St Pancras Channel Tunnel rail link last night confirmed they have been in talks for the last few weeks on a possible deal. They said that “the merger of the two groups has the potential to create a market leading business … of considerable depth and scale”.

Should a merger be agreed, the companies can expect the deal to be scrutinised by the Competition Commission, especially since both companies hold a huge stake in public sector work. Balfour remains rudderless after its former chief executive Andrew McNaughton was shown the door in May.

The Independent revealed last month that both firms had pocketed hundreds of millions of pounds of profits in the past four years by exploiting deals that were controversially awarded to them by the last Labour government.

Balfour alone profited to the tune of £188.9m from the rising value of its private finance initiatives (PFIs) and public private partnerships (PPPs).

Analysts said last night that a tie-up to form a broad infrastructure services group could save millions of pounds. Carillion is strong in the services sector and Balfour has a track record in construction.

Carillion works with the Government on a £500m project to roll out superfast broadband to 33 local authority regions, while Balfour Beatty has been working on transforming the Olympic Stadium in London into the new home of West Ham United.

Any merger is unlikely to happen until the end of the summer. Carillion’s chief executive, Richard Howson, is expected to run the new company, which would rank among the FTSE 100.

Carillion has performed better than its rival and potential bedfellow in recent months, winning a £75m contract to expand Liverpool football club’s Anfield stadium. Its new orders stand at £2.7bn, including the first phase of the Battersea power station regeneration.

By comparison, Balfour Beatty issued its second profit warning in two months three weeks ago, blaming problems with engineering contracts in London, and revealed a £35m blow to profits from its engineering services division.

The first profit warning in May led to Mr McNaughton’s departure, but the company has had problems for more than a year.

In 2013 the company made losses of £60m in the UK, owing to fierce competition over government contracts, which squeezed profit margins. As a result the company made plans to sell its North American engineering design services group, Parsons Brinckerhoff, which it bought for £354m in 2009.

News of the talks emerged on Sky News after markets had closed last night. The companies’ confirmation means that they now have until the 21 August under City rules to announce a deal, although this could be extended.

Both companies were criticised previously for their use of PFI and PPP deals as a way to make extra cash. The firms had been doubling their money by “flipping”, or selling on the projects, just four years after finishing them. Four contractors alone – Balfour Beatty, Carillion, Interserve and Kier – made profits of more than £300m.