Balfour Beatty left ‘weak’ after rejecting Carillion bid

Balfour Beatty’s decision to call off merger talks with Carillion leaves it in a “weak” position and open to a hostile takeover bid, analysts have said.

This morning, Balfour Beatty unilaterally announced that it had called off its merger talks with Carillion, saying Carillion had demanded Balfour’s consultant arm Parsons Brinckerhoff, which it is currently selling, should form part of the deal.

When the two firms announced they were in merger talks last week they said the sale of Parsons would “proceed unaffected” by any merger.

Balfour Beatty today said it had terminated the discussions over a merger following Carillion’s “wholly unexpected decision” to insist that a possible merger include Parsons Brinckerhoff.

Carillion subsequently hit out at Balfour’s “unilateral” decision to end the talks, saying it still believed there was a “powerful” case for a merger of the two construction giants.

Following Balfour’s announcement today its share price fell by 6%, trading at around £2.38, while Carillion’s fell by 3%, trading at around £3.40.

Stephen Rawlinson, an analyst at Whitman Howard, said Balfour’s announcement that it was walking away from the talks was “odd both in tone and content” and left the firm in a “weak position”.

He added: “We can see that Balfour Beatty might be annoyed that Carillion may now think that the merged entity might wish to keep Parsons having previously indicated the sale could go ahead.

“But equally, a hasty sale of Parsons from a position of weakness which Balfour Beatty is now in does not help either company.”

Rawlinson added that Balfour Beatty “appears to have taken the view that the sale of Parsons is more important than working with Carillion to create synergies that will deliver we believe around £200m of annual improvement, permanently and create a more robust and profitable business”.

He added: “The Balfour Beatty priority is to fund a business that is failing with asset sales rather than work with Carillion to create a much more robust business.”

Balfour Beatty had announced its intention to sell its consultant arm Parsons Brinckerhoff to refocus on its UK and US construction businesses in May, with the move widely seen as an abandonment of its long-term strategy of diversifying into a global construction and professional services company.

The announcement followed a dire period for the firm, with a series of profit warnings prompting the exit of chief executive Andrew McNaughton in May.

Rawlinson said he doubted that Balfour Beatty would be able to get the $900m (£533m) that it wants for Parsons Brinkerhoff given Balfour Beatty’s position of weakness, following its recent troubles.

He said that although Balfour Beatty paid $636m (£377m) for Parsons in 2009 he suspected the consultant’s $91m (£54m) pension deficit had “not improved and potentially got much worse”.

He added that Carillion was “correct” to want to keep Parsons as part of any future combined entity.

He said: “From Carillion’s perspective the discussions were always going to be low risk and the change of heart on the sale of Parsons was correct in our view given that the integrated model works in the USA from what we can see, but not in the UK, especially in the type of regional contracting on which Balfour Beatty is focused.

“The prospects for Carillion remain very positive and this may be a lucky escape.”

Joe Brent, analyst at Liberum, said Balfour Beatty could still find itself on the receiving end of a hostile takeover bid from Carillion, and would be seen as “in play” by other potential bidders.

He said: “Whilst Balfour Beatty is prevented from bidding for Carillion [because of stock market rules] the reverse does not apply.”

Brent said it seemed that Balfour Beatty’s statement has taken Carillion “by surprise”.

He said: “It is surprising that Carillion wanted to keep Parsons Brinckerhoff, given that they have historically been opposed to owning a consultant.

“Perhaps Carillion could only make the maths stack up by owning Parsons Brinckerhoff, which may be a source of some worry for Balfour shareholders.”

Kevin Cammack, analyst at Cenkos, said Balfour’s decision to reject Carillion’s demand that Parsons be included in any merger deal showed that the sale of the consultant was either “well advanced” and possibly “subject to exclusivity or due diligence”.

He added that he thought Carillion’s change of heart could have been driven by Carillion shareholders being reticent to accept any merger that did include Parsons Brinckerhoff.

This week market commentators suggested a number of firms were looking at £167m-turnover Parsons, which Balfour Beatty acquired in 2009, with Atkins, WSP and CH2M Hill all mentioned as possible buyers, along with steel giant Tata and Chinese firms looking to enter the UK professional services market.

Atkins, WSP, CH2M Hill this week all declined to comment on whether they were interested in Parsons.