Balfour Beatty rejects revised Carillion merger proposal

Recognition by Balfour Beatty of the value that its people have to the business is in part behind chairman Steve Marshall and the board's decision on Monday to reject a renewed merger approach from Carillion. Jackie Whitelaw analyses the unfolding story.

Jackie Whitelaw
11 August 2014

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For the merger with Carillion to make sense financially, deep cuts would have had to be made particularly in the Balfour Beatty Construction Services division mainly through job losses. This would reduce the ability to bid and deliver work at a time when growing markets in the UK and the US mean quality personnel are becoming an increasingly valuable resource.

And in the case of Parsons Brinckerhoff which is up for sale, loss of staff through uncertainty would damage its competitive position.

Listing the reasons for rejecting Carillion’s proposal the Balfour Beatty board said that “significant execution risk associated with the integration of the two businesses would be substantially increased by any material revenue reduction  in Balfour Beatty’s Construction Services UK business.

"A failed sale process would materially impact the motivation and retention of Parsons Brinckerhoff management and employees and damage its competitive position in a rapidly consolidating professional services market”

“Any material reduction in Balfour Beatty’s revenues in Construction Services UK would create unacceptable operational and financial risks.”

In a long list the board also said the merger would “remove profitable business opportunities, taking away future earnings recovery potential”.

Construction Services was at the root of some horrible – even though expected - half year results for Balfour Beatty, also announced on Monday. The group made a pretax profit of £1M on a turnover of £4851M with Construction Services reporting a loss of £76M.

Balfour Beatty has said that poor contract management and bidding has created its problems in Construction Services.

It has overhauled the division and instilled a fresh focus on getting paid, tighter contract control and more selective bidding. New management is also in place with new managing director Mark Hoyland starting next week in the outfit responsible for £55M of the loss, the M&E engineering services operation.

Hoyland still has 18 tricky contracts to manage until they run out at the end of this year. But Balfour Beatty believes that with good performance in the first half year from its other divisions and a steady order book of £13bn it can turn the corner on its own and keep the personnel on the books that it needs in Construction Services to return to and increase profit.

Carillion’s revised merger proposal still included the demand that caused talks to breakdown before –that consultant Parsons Brinckerhoff be included in the deal rather than sold as Balfour Beatty wants. Carillion had said it “would agree to cover appropriate bidder costs for the remaining bidders in the sale process, if these bidders could be persuaded to proceed on the basis that the merger did not ultimately happen”.

However in rejecting the proposal Balfour Beatty said: “Bidders for Parsons Brinckerhoff may not regard the cost cover as adequate to remain committed to the process with the resultant risk that the sale process would be terminated”.

It said there was a “risk that a failed sale process would materially impact the motivation and retention of Parsons Brinckerhoff management and employees and damage its competitive position in a rapidly consolidating professional services market”.

And it said “the impact of terminating the Parsons Brinckerhoff sale process would be compounded if the merger with Carillion did not complete, in which case any associated loss of value would be entirely for the account of Balfour Beatty’s shareholders”.

In its results statement Balfour Beatty said it expected round three bids for Parsons Brinckerhoff “shortly”.

Analysts value the consultant at around £600M. In the results statement Balfour Beatty said that from the sale it anticipated it would return up to £200M to shareholders.

Carillion has until 21 August to consider its position. In a statement it said: “The board of Carillion will give further consideration to its position and will make a further announcement in due course. In the meantime, there can be no certainty that any offer will be made by Carillion or as to the terms on which any such offer might be made."

Read the Balfour Beatty “Rejection of Carillion’s merger proposal” here

Read Balfour Beatty’s half year results to 27 June 2014 here