Balfour Beatty rejects two merger proposals from rival Carillion

Construction and engineering giant Balfour Beatty's lay out reasons for Carillion proposals rejection

Balfour Beatty
Balfour Beatty

Construction and engineering giant Balfour Beatty has announced that it has rejected two proposals from rival Carillion, after merger talks broke down between the two sides.

It had been reported that Carillion was pressing Balfour Beatty, which employs around 850 people in the North East, to reopen merger talks, a move that could create a £3bn construction giant.

Balfour aborted the talks with Carillion a week after they began, blaming its “wholly unexpected” demand that Parsons Brinckerhoff remain part of the group.

In a note to shareholders on the stock exchange Balfour said it wished to inform the market about the initial proposal put to it by Carillion, a subsequent revised proposal and the reasons for the rejection of those proposals.

Balfour said it agreed to talks on the basis of a list of key terms, including confirmation from Carillion that they were supportive of the Parsons Brinckerhoff disposal process, and that Balfour Beatty would nominate three non-executive director positions in a total board of 10, that Steve Marshall would be deputy chairman while the chairman, chief executive officer and chief financial officer roles would be appointed by Carillion.

However, on July 30 Carillion wished to change the terms and retain the Parsons Brinckerhoff business.

Carillion proposed a revised set of terms at a meeting on August 3, in which it was proposed to keep the 56.5%/43.5% split of the business as previously agreed, but changes and additions were made to the key terms of the proposal.

Carillion wanted Parsons Brinckerhoff to remain in a combined business but said it would agree to cover appropriate bidder costs for the remaining bidders in the sale process, if the bidders could be persuaded to proceed on the basis that the merger did not ultimately happen.

In the market statement Balfour said: “The board has carefully considered the revised proposal from Carillion including the business plan for the combined business.

“While the board is mindful of the synergies that might be achieved through a combination with Carillion, the board has concluded that there are a number of significant risks many of which cannot be mitigated.

“Risks include the risk of undermining the Parsons Brinckerhoff sales process which is a key strategic objective of the Group, particularly as there is no strategic logic for its retention other than to enhance the earnings of the combined group.

“Bidders for Parsons Brinckerhoff may not regard the cost cover as adequate to remain fully committed to the process with the resultant risk that the sale process would be terminated

“The risk of engaging in detailed due diligence with a competitor while having serious reservations about the transaction and its deliverability.

“In light of these considerations on the revised proposal, the board has lost confidence in the likely delivery of a successful transaction and has therefore concluded that the current proposal from Carillion is not in the best interests of Balfour Beatty shareholders.

“With the Parsons Brinckerhoff sale process proceeding in line with the Board’s expectations, the board is clear that its current plans to refocus and simplify the group, including the sale of Parsons Brinckerhoff, remains the most attractive option.”

The announcement comes after the firm announced that its half-year pre-tax profits have been slashed from £47m to £22m, after its performance was affected by contract write-downs.

The firm said its US construction services division performed well and other parts also fared well, but cited “operational issues” in the mechanical and electrical engineering parts of its UK construction business for a “disappointing first-half performance for the group as a whole”.

In a market note announcing results for the six months ended June 27 the firm, said its order book was stable at £13bn, down 1% from the year end.

Group turnover for the period was £4.17bn, down 3% on last year’s first-half figure of £4.31bn.

Its sale of Parsons Brinckerhoff – a move which stunned the city when it was first announced, is said to be well advanced and, subject to satisfying the interests of key stakeholders, the group said it will return up to £200m to shareholders.

The firm said it ended the period with a resilient balance sheet supported by a strong investments portfolio. Average net debt was higher than management expectations, predominantly due to the issues in UK construction, and higher than expected working capital in professional services and support services.

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