Balfour Beatty, Carillion in talks again as deadline looms
Ken Odeluga August 19, 2014 10:27 PM
<p>Balfour Beatty Plc., the infrastructure-focused construction firm and Carillion Plc., the integrated support services firm with a portfolio of construction businesses, are back in talks […]</p>
Balfour Beatty Plc., the infrastructure-focused construction firm and Carillion Plc., the integrated support services firm with a portfolio of construction businesses, are back in talks after Carillion returned to the table with an improved offer.
The news comes just hours after a large shareholder in both companies went public with demands for the pair to resume bid talks.
A spokesman for Standard Life, the pensions and investment management group, said earlier on Tuesday (19th August) in a television interview there was scope for Carillion to “modestly improve” its original terms for Balfour Beatty from an offer to the latter’s shareholders equating to 56.5% of a Carillion share for each Balfour share owned.
“If they do that, Balfour Beatty should reopen merger talks unless they have got a credible alternative”, said David Cumming, head of UK equities at Standard Life.
Carillion’s new offer revealed Tuesday afternoon proposes a ratio of 58.27% per share, for Balfour holders, in the enlarged company resulting from a merger.
There appear to be just two days remaining before the “put up or shut up” deadline—the time permitted by the Takeover Panel following submission of a corporate offer.
Balfour rejected Carillion’s previous offer 5 days ago. In a statement released on Friday, Balfour dubbed the offer “opportunistic” and warned that acceptance of the terms would significantly limit its ability to participate in the UK’s recovering construction sector.
Balfour also disputed the £175m in cost savings Carillion said the deal would produce.
Balfour pointedly noted cost savings driven by shrinking the business do not necessarily lead to synergies. In its view, the capitalised value of the proposed synergies “would be materially lower” than Carillion’s projection of £1.5bn.
It said Carillion was not taking into account “associated costs” of £225m.
Balfour is in the middle of a corporate revamp that will take some time
The proposed merger target is in the middle of a corporate restructuring that will take time to yield dividends, in the broadest sense, for its shareholders.
It is understandable then why news of the resumed merger talks sent Balfour stock more than 5% higher on the day at 262.4p.
Balfour’s implied alternative to the proposed is to deliver efficiencies in its own business and take a percentage point off its overheads to 5% by slimming down management, consolidating and making efficiencies in its supply chain.
Additionally, Balfour has stepped up efforts to sell Parsons Brinckerhoff, a US design consultancy.
Earlier Tuesday there were reports that Balfour was in advanced talks to sell the consultancy to WSP Global, a Canadian construction group, for £700m.
Balfour Beatty issued a profits warning in May of this year, which saw its shares fall 20% in one day after which it announced a strategic review.
Its trading statement a short time later did nothing to dispel an air of gloom over its business.
Carillion is the stronger business, although its revenues are smaller
Carillion has performed better than its proposed merger partner recently, although its turnover is smaller than the latter. Carillion sales last year were £3.3bn, less than half of Balfour’s £8.7bn. Even so, Carillion was more profitable in 2013, with £110m in pre-tax profits whilst Balfour had £32m.
An additional and crucial factor Balfour’s holder will have in mind: a sharply deteriorating free cash flow trend that has been in the red since 2010, judging by data from Thomson Reuters.
Its last reported cash flow figure looks to be £366m in the red. In other words, Balfour has no cash left after servicing operational, investing and financing activities.
Overall, it’s not too much of an overstatement to say Balfour’s management team is looking increasingly cornered.
There is certainly little to go for in Balfour as an investment without the bid, although traders will certainly make light work of a number of pivotal price points brought about by recent stock volatility.
Balfour’s stock chart shows a clear rising channel following a dire drop to 192.6p on 3rd July. Persistent support has been seen over the last 4 months around 225.20p, but any further resistance to the offer from Carillion will take Balfour’s stock back to today’s low of 245p, potentially followed by 241p, to begin with.
Carillion shares closed today 0.2% lower at 337.53p. The stock has retained a 2.1% advance in the last month although it was almost 10% ahead for the month in late July.
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