Banks’ approval key to £820m Parsons Brinckerhoff sale

City analysts have warned that Balfour Beatty’s banks could present a hurdle to its sale of Parsons Brinckerhoff to WSP for £820m because it would substantially downsize the UK contracting giant.

Last night, Balfour Beatty and WSP announced they had reached a deal to sell Balfour’s consulting arm for £820m.

The sale, which is expected to compete before the end of the year, would mean Balfour Beatty would no longer have the benefit of Parsons Brinckerhoff’s revenue, which was £1.6bn last year.

Of the £820m cash payment from WSP, £67m will be left as cash in the Parsons Brinckerhoff business.

Balfour will use the proceeds from the sale to pay up to £200m to shareholders, £85m into its pension fund, £50m in taxes and transaction costs, £30m in separation costs, leaving it with around £388m to strengthen its balance sheet. Balfour expects to have an average net debt of £450m in 2014.

Stephen Rawlinson, analyst at Whitman Howard, warned Balfour Beatty’s banks may need a lot of convincing to go along with the sale of Parsons Brinckerhoff.

He said: “Balfour Beatty has to get the approval of its shareholders and its banks. The former might be easy but the latter might be tough as the sale reduces operating earnings on a pro forma basis by c £60m this year on a current earnings capacity of around £250m (£10bn annual revenue with Parsons, assuming the UK construction [business] gets back to profit). The banks will want to see solid proof that the UK is back on track.”

While he said downsizing the firm to US and UK based construction and investment company had “logic” he said: “The question is whether what remains is attractive.”

Rawlinson said companies “rarely shrink to greatness” but that “the scale of the issues at Balfour Beatty” meant that it needed “to take a step back to leap forward”.

Andrew Gibb, analyst at Investec, said £820m was “undoubtedly a very good price” for Balfour Beatty to sell Parson Brinckerhoff for.

When asked if he thought the banks might oppose the sale he said: “What we do know is that Balfour Beatty has a big refinancing to do in 2016. Whether the banks are comfortable with the current level of facility on a pure construction business we don’t know.”

He said the amount of money Balfour eventually returned to shareholders from the sale – it has said it will be up to £200m – would give an indication of how comfortable the banks were with lending to a smaller Balfour Beatty business.

But Kevin Cammack, analyst at Cenkos, said there was “no way” Balfour would have been able to make public statements about how much it would return to shareholders without the “tacit approval” of its banks and therefore he doubted there would be any issues.

He added: “I would also add for those thinking this might leave the way open for Carillion to return with an offer [of acquisition or merger] that it is my understanding that the insistence of keeping Parsons Brinckerhoff in the merged structure was mainly around a lack of bank funding support whilst awaiting the cost savings/synergies (£175m plus) to come through in 2016.”

Gregor Kuglitsch, analyst at UBS, said the sale price was “reasonable” and a “positive” step for Balfour Beatty.

But he added: “More challenging steps are still ahead: the successful turnaround of the UK construction and recruitment of a new CEO that can deliver this are key for the investment case of the shares.”