Balfour Rejects Revised Merger Proposal by Carillion

Balfour Beatty Rejects Revised Merger Proposal by Carillion
A digger operates near the gates of a construction site for new apartment blocks built by Carillion Plc in the Canning Town district of London. Carillion had approached rival Balfour to revive merger talks that collapsed in late July, two people familiar with the situation said yesterday. Photographer: Simon Dawson/Bloomberg

Balfour Beatty Plc rejected a renewed merger proposal by Carillion Plc to form the U.K.’s biggest builder with a market valuation of about 3 billion pounds ($5 billion) because of a dispute over whether to dispose of the Parsons Brinckerhoff division.

The sale of Parsons, a New York-based Balfour Beatty unit specializing in engineering consulting, is “a key strategic objective” because there’s “no strategic logic” to retaining the business, the company said today. Balfour also cited potentially higher reorganization costs and working-capital outflows as reasons for its rejection. Balfour shares rose 1.3 percent as of 9:23 a.m. while Carillion gained 0.9 percent.

The deal would have combined Carillion’s growing services business with Balfour’s building operations, which have struggled since the global recession, with a lack of building work in the U.K. and the cancellation of projects across Australia, where the company cut hundreds of jobs last year. Carillion, based in Wolverhampton, England, has been expanding its maintenance offerings for industries such as rail and telecommunications.

“A deal now looks less likely,” Liberum Capital analysts including Joe Brent wrote in a note to clients today. “The organic road to recovery will be long and not always smooth, but it nevertheless offers huge margin recovery potential. There is a long to-do list and there will be no quick-fix in the go-it-alone strategy.”

Olympic Stadium

Balfour, whose projects include the transformation of London’s 2012 Olympic athletics stadium into a mixed-use arena, today also reported a 55 percent decline in first-half adjusted net profit to 13 million pounds. Revenue fell 2.1 percent to 4.9 billion pounds.

Carillion had approached London-based rival Balfour to revive merger talks that collapsed in late July, two people familiar with the situation said yesterday. Carillion had reached out to Balfour executives to make the case that market reaction to the breakdown of their discussions makes restarting talks desirable, the people said, asking not to be identified because the matter is private.

No Confidence

“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,” Balfour said today, adding that it remains open to “strategic value creating opportunities.”

Carillion is evaluating its position before making a further announcement, it said in a statement today, adding that there is no certainty that any offer will be made.

Before today, shares in Balfour had fallen 17 percent this year, valuing the company at 1.6 billion pounds, as Andrew McNaughton stepped down as chief executive officer in May after 13 months in the role. His departure followed a second warning inside two months that full-year profit would miss forecasts. Chairman Steve Marshall took over the running of Balfour on an interim basis.

The company hasn’t been able to realize planned savings from synergies with Parsons, while its competitors in the consulting industry are “rapidly consolidating,” Marshall said in a conference call with journalists.

Balfour expects to return as much as 200 million pounds to shareholders from the sale of Parsons, it said today. The division could be valued at 700 million pounds, Liberum Capital estimated.

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