Balfour Beatty appoints new chief exec - shareholders to vote on PB in two weeks

Sale needed to avoid risk of a breach of banking covenants; deal includes commitment to carry certain current outstanding and potential future PB litigation losses not covered by the consultant’s insurance.

Balfour Beatty shareholders will vote on the sale of Parsons Brinckerhoff to WSP on 28 October, the contractor has said. The vote will mark a crucial phase in the sale process and allow for completion of the deal before Christmas.

LATEST: Balfour Beatty has appointed Leo Quinn as its new chief executive officer, taking up the new £800,000 a year position and joining the Board on 1 January 2015. Quinn joins after five years as group chief executive of defence solution business QinetiQ. A civil engineer, Quinn began his career at Balfour Beatty in 1979 in the UK construction services business. Executive chairman Steve Marshall said: “Leo is an outstanding individual with an excellent track record in improving the performance of major international businesses. I am confident that Balfour Beatty will thrive under Leo’s leadership.” Quinn said: “I am very proud to be rejoining a company so ingrained in British engineering. I am keen to work with them to create something significant and lasting.”

The sale is needed to help avoid risk of a breach of banking covenants and includes a commitment to carry certain current outstanding and potential future PB litigation losses not covered in full  by the consultant’s insurance.

Balfour Beatty warned shareholders on Friday in the publication of the Circular to Shareholders relating to the sale of Parsons Brinckerhoff that if the £820M sale is not approved it would risk breaching its banking covenants.

Mitigation measures in that case could involve a quick sale of PPP investments and cancelling of shareholder dividends.

The circular to shareholders said: “If Shareholders do not approve the transaction, the group is expected to have less headroom on net debt to EBITDA covenants given as part of its funding arrangements. In this scenario, should there be a further modest deterioration in the profitability of the group, and in the absence of any mitigating action, there may be a breach of the net debt to EBITDA covenants…. The board has available a number of mitigating actions which can be taken to address the potential risk of such a covenant breach. The board would in particular accelerate the disposal of investment assets ….The sale of investment assets could also be supplemented by other steps to conserve cash which could include cancelling, reducing or postponing dividends if necessary.”

Key risks for Balfour Beatty if the sale of Parsons Brinckerhoff to WSP does go ahead include:

An agreement that Balfour Beatty will cover any losses not covered by PB’s insurance in relation to certain outstanding and potential future litigation.

The Retained Group will no longer benefit from geographic and sector diversification provded by PB and its earnings will be more cyclical as a result and this will be heightened by its increased exposure to the United Kingdom and United States construction markets.

Operational and commercial issues in the Retained Group’s UK construction business are likely to have a proportionally greater impact.

In 2013, Parsons Brinckerhoff generated revenues of £1.57bn, underlying profit from operations of £56M, underlying EBITDA of £69M and profit before tax of £27M. As at 27 June 2014, the order book stood at £1.3bn and gross assets were £0.8 bn.

Balfour Beatty acquired Parsons Brinckerhoff in September 2009 for £382M (£366M following post-completion adjustments). The group announced its sale in May after a strategic review which it said revealed that owning a consultant “had not led to a material competitive advantage for the group”.

"Mitigation measures (in the event of shareholders not approving the deal) could involve a quick sale of PPP investments and cancelling of shareholder dividends."

Balfour Beatty reported a fresh £75M black hole in profits at its Construction Services UK business at the end of September, just months after a £35M profit shortfall for the division in July and £30M in May. Since May 2013 the group has recorded lost profits of £190M largely from Construction Services.

Proceeds from the sale of the Parsons Brinckerhoff business would be used by Balfour Beatty to return £200M to shareholders through a share buyback scheme, £85M for the pension scheme and the rest retained to strengthen the balance sheet.

Read our analysis at the start of the PB sale discussion - Marshall's PB conundrum: unintegrated but undoubtedly useful

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