The ailing builder Balfour Beatty laid itself open to a fresh takeover attempt by its smaller rival Carillion yesterday after a £70m profit warning and the announcement it is reviewing its dividend policy.
Balfour fended off a £3bn all-share merger offer from Carillion in the summer but the six-month period since the expiry of the bid lapses on 21 February, allowing a fresh approach.
As well as the builder’s sixth profit warning in two years, the new chief executive Leo Quinn – a veteran of corporate turnarounds at the bank-note printer De La Rue and defence company Qinetiq – scrapped a £200m share buyback proposed after the sale of Balfour’s US consulting arm, Parsons Brinckerhoff. This is to shore up the balance sheet while he gets to grips with a lengthy repair job.
The latest blow to profits takes total loss provisions for a disastrous year past the £200m mark. Mr Quinn said the sprawling construction business had been guilty of a “conspiracy of optimism”.
The accountancy firm KPMG, brought in to review the UK construction arm last year, identified fresh losses on problem contracts and recommended the company sharpen its poor bidding and contract management.
Joe Brent, an analyst at Liberum, said: “We still believe that a bid is possible and Carillion is free to make a new approach in a month. This may not be the cleansing statement that investors had hoped for, but there is as much recovery potential as ever and buyers will be watching closely.”
As well as Carillion’s interest, the investor John Laing Infrastructure Fund made an opportunistic low-ball bid late last year for Balfour’s portfolio of investments in UK and US public sector projects, such as schools and hospitals. The company yesterday valued the portfolio at £1.3bn.
Mr Quinn, however, played down talk of a sale of the portfolio and a merger. “My focus is on the existing business and the existing shareholders and ensuring that the full value of what we create gets accredited to them,” he said.
But big job reductions are likely in the UK construction arm. Mr Quinn flagged up “significant opportunities” to cut costs but said it was “far, far too early” to be specific about job losses at the unit, which employs more than 9,000 staff. He added: “Clearly the company has become too big, too quickly… This is about getting back to basics and getting it right.”
Responding to the KPMG report, Mr Quinn said: “Balfour Beatty is a large organisation which had become too complex and too devolved for adequate line of sight and financial control. The key is that these issues can be put right and we now have clear action plans in hand.”
KPMG identified the losses on a sample of contracts that only accounted for a third of the construction division’s revenues. The company will make another statement in March – raising the prospect of yet more losses. Stephen Williams, an analyst at Brewin Dolphin, said: “We hope that the contracts that were not reviewed do not cause any more problems.”
Balfour added that its year-end order book would be below the third quarter’s £11.7bn, although it closed the year with net cash of around £180m. Balfour has a contract to help convert the Olympic Stadium into a new home for West Ham United FC.
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