Balfour Beatty workmen on a site. Balfour’s shares are trading at a premium to Carillion’s on a price-to-earnings basis, partly on expectations of an eventual return to profit and the earnings potential of its private finance initiative deals with the state.

Says there is no strategic logic to combination; deal would boost Carillion’s international business; Carillion considering its next move; companies have combined market value of £3bn; Balfour half-year underlying pretax drops 53%

Reuters

London

British infrastructure company Balfour Beatty has rejected a second merger proposal from rival Carillion, saying it would pose significant risks to its business.

Lossmaking Balfour Beatty said yesterday there was no strategic logic to a combination other than to enhance the combined group’s earnings, and the risks were significant.

Balfour has construction, engineering and facilities management services in over 80 countries. A tie-up would expand Carillion’s international business and add breadth to its construction activities.

Carillion’s approach, made public on July 24, followed a difficult 18 months for Balfour, which has issued a series of profit warnings and lost its chief executive in May.

Balfour broke off the talks a week after they emerged because Carillion insisted that Balfour cancel the planned sale of its US unit Parsons Brinckerhoff and keep it in the merged company.

Carillion’s revised proposal included a final dividend payment for Balfour shareholders and the covering of “appropriate costs” for Parsons Brinckerhoff bidders. Carillion also wants a deadline extension until August 28 to make a formal bid.

“In our board’s judgment, it wasn’t a credible proposal that was going to fix all the risks for Balfour Beatty shareholders,” Balfour executive chairman Steve Marshall told reporters.

“For example, if bidders (for Parsons Brinckerhoff) were not prepared to carry on and if the merger then didn’t go through, Balfour Beatty is basically left with a failed merger transaction and damage to Parsons Brinckerhoff,” he said.

Carillion said it would consider its position and make a statement in due course.

The companies have not disclosed financial terms of Carillion’s proposal. They have a combined market capitalisation of £3bn ($5bn).

Whitman Howard analyst Stephen Rawlinson called Balfour’s decision to go it alone a “brave move”, and that Carillion’s management could have brought “great benefit” to Balfour.

He has a “sell” rating on Balfour shares and a “buy” on Carillion. Balfour shares were up 2.8% at 244 pence by 1124 GMT.

Balfour announced the plan to sell Parsons Brinckerhoff in May. It acquired the business in 2009 for £636mn but has said it failed to deliver significant benefits.

Besides its construction operations, Carillion maintains British railways, roads and military bases, partly under public-private partnership contracts. It has won a string of contracts in the past 18 months’ worth £10bn.

Carillion’s shares have fallen 2.9% so far this year while Balfour’s are down 18% — including a 6% fall since it revealed the merger talks.

Niall Dineen, portfolio manager at AGF International Advisors and a shareholder in both companies, said the cost savings would be significant for both firms and that Carillion’s management may be better placed to manage the combined group.

“The whole idea of putting Balfour and Carillion together makes sense because there should be synergies that could come out of the deal. I know people had been talking about 200-300mn of synergies, which is quite a big number in the context of the two companies,” he said.

Reporting results two days early yesterday, Balfour Beatty said it made a net loss in the six months to June 27, while underlying pretax profit fell 53% to £22mn.

It was hit by a slump in its mechanical and electrical engineering division, which it already flagged in July, and said it was performing in line with its most recent trading update.

Marshall said the company’s search for a new CEO was ongoing and it still aimed to return £200mn to shareholders.

Balfour’s shares are trading at a premium to Carillion’s on a share price-to-earnings basis, partly on expectations of an eventual return to profit and the earnings potential of its private finance initiative deals with the state.

“If Balfour is prepared to walk away from the merger, where there are potential cost savings, they do really have to demonstrate the value in the business,” said Howard Seymour, an analyst at Numis Securities.