Carillion sounds out shareholders but Balfour Beatty bites back

UK construction would bear brunt of cost savings to make deal viable Carillion has revealed.

Jackie Whitelaw
12 August 2014

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Carillion has released more information about how it would cut costs in merger with Balfour Beatty which would involve scaling back on contracting activity and developing the services business in line with Carillion’s own recent strategy. It also said it had held meetings with a number of Balfour Beatty’s main shareholders following rejection of its revised merger plan by Balfour Beatty on Monday.

The statement said: “The board of Carillion is confident that as a direct result of the merger the cost base of the combined group could be reduced by at least £175M a year by the end of 2016 and that earnings would consequently be enhanced from that year."

Carillion’s envisaged business plan for the group is to refocus significantly the UK construction services business…principally through focus on contract selectivity and to grow its services business, such that within the medium term, two thirds of the combined group’s operating profit would derive from services and investments with one third coming from construction.

Cost efficiencies identified were in back office, head office, business and support functions (£82M), supply chain (£36.5M), information and communications technology (£13M), property consolidation (£17.5M), and agency labour, fleet and general overhead structure (£26M).

Cost savings relate only to UK businesses of Balfour Beatty and Carillion and not to any overseas business (including Parsons Brinckerhoff).

Merger talks between the two companies broke down when Carillion insisted that consultant Parsons Brinckerhoff remain part of the deal. Balfour Beatty is in advanced talks to sell the consultancy business.

“Carillion continues to believe in the powerful strategic logic and financial benefits of a merger with Balfour Beatty and is therefore considering its position,” Carillion said.

In a swift response Balfour Beatty said that  "the substantial rescaling - possibly by up to two thirds - in the revenue of Balfour Beatty's UK construction business would eliminate future earnings recovery potential".

It also said: "Carillion continue to require Parsons Brinckerhoff to remain part of the potential combined business, without providing any strategic or value related logic for its retention, other than for financial presentation purposes. Balfour Beatty has been clear that Parsons Brinckerhoff has not provided synergistic benefits for the Group over five years of ownership, and this has not been disputed by Carillion. Their proposed approach would result in the likely termination of the Parsons Brinckerhoff sales process. This risks damage to that business, as well as eroding its competitive position, and potentially resulting in a loss of value to our shareholders".

Balfour Beatty put out a subsequent response on Friday (15 August) in a bid to convince shareholders that Carillion’s plans for a merger of the two companies would not create the £175M a year cost savings and enhanced earning base suggested. 

The Balfour Beatty board said that cost reductions created by rescaling  “will reduce the amount of available synergies that flow through to profitability. Cost savings driven by shrinking the business should not be confused with synergies. These reductions in cost will reduce the amount of the £175M that could enhance profitability.”

It pointed out that to cut the Carillion proposals £2.3bn Construction Services business by two thirds have come at a time when construction is predicted to grow 22% over the next five years.

Most of the cuts would be made in the regional businesses , where Balfour Beatty said, “we have seen a steady increase in our bid margins on new orders which are up by 2.8 percentage points since the start of 2013”. 

Balfour Beatty also said: “The combined group would be of a significantly larger scale and diversity than the Carillion management team has previously managed, with annual revenues of c.£14bn and c.80,000 employees, excluding joint ventures. The proposed retention of Parsons Brinckerhoff exacerbates the scale of the challenge at a time when the management team would be undertaking a fundamental downsizing of the UK construction businesses.”

Balfour Beatty said it had its own plans to cut costs by reducing management layers and consolidating regional offices, more centralisation of support functions and a focus on the supply chain. Supply chain improvements it said would result from “aggregating and centralising the core of our procurement, leveraging our scale as the UK’s largest single contractor to secure direct and indirect cost reduction”.

Read the Carillion statement here

Read the Balfour Beatty statement here