14th Aug 2014 13:50
LONDON (Alliance News) - Construction companies Carillion PLC and Balfour Beatty PLC remain at loggerheads over their mooted merger Thursday, disputing the structure of the enlarged group, the benefits the deal would bring to either company, and the sale of Balfour Beatty's US project management business Parsons Brinckerhoff - arguably the biggest bone of contention.
Carillion continues to court Balfour Beatty and its owners, and said Thursday it has met with a number of Balfour Beatty's major shareholders following two unsuccessful offers to its board.
The initial proposal for a merger of Balfour Beatty and Carillion implied an ownership split which would have been 51% of the combined entity to Balfour Beatty shareholders and 49% to Carillion shareholders.
Following successive negotiations with Carillion over several weeks Balfour Beatty said it agreed to engage with Carillion at the end of June on the basis of an all-share combination with 56.5% undiluted ordinary equity to Balfour Beatty shareholders and 43.5% to Carillion shareholders.
At the time the two companies confirmed publicly that they were in talks to create a construction services powerhouse worth around GBP3 billion, and both Carillion and Balfour Beatty said the sale of Parsons Brinckerhoff would proceed as expected.
Balfour Beatty said Carillon subsequently proposed revised terms on August 3. It was happy to keep the 56.5%-43.5% split of the business as previously agreed, but made some changes and additions to the key terms of the proposal, including for Parsons Brinckerhoff to remain part of a combined business.
That caused Balfour Beatty to end the talks even though negotiations were at an advanced stage.
Balfour Beatty on Monday said it carefully considered the revised proposal and concluded that there were a number of significant risks, many of which could not be mitigated. This included the risk of undermining the Parsons Brinckerhoff sales process, which is a key strategic object of the group, particularly as there is "no strategic logic for its retention other than to enhance the earnings of the combined group."
The company also said there is a risk that a failed sale process could damage Parsons Brinckerhoff's competitive position in a rapidly consolidating professional services market.
To sweeten the deal, Carillion on Thursday proposed that Balfour Beatty's shareholders receive an additional cash dividend, or equivalent, of 8.5 pence per Balfour Beatty share at the time that Balfour Beatty's final 2014 dividend would otherwise have been paid in 2015.
"This would be in addition to the final 2014 dividend they would be entitled to receive as shareholders in the enlarged group," Carillion said in a statement.
However, Balfour Beatty has refused to budge and responded on Thursday that Carillion has yet to address a number of risks it outlined in its statement on Monday.
Carillion's business plan for the enlarged group is to shrink the combined UK construction services business in a similar manner to the downsizing it undertook in respect of its own UK construction business, principally by being more selective in the contracts for which it bids, and to grow the combined services business, such that, within the medium term, two thirds of the combined group's operating profit would derive from services and investments, with one third coming from construction.
Balfour Beatty has a different idea. It wants to grow its UK construction business. The unit has improved of late and posted an increase in revenue to GBP3.16 billion for the six months ended June 30 from GBP3.14 billion a year earlier. Balfour Beatty said the construction services business has seen an improvement in the quality of new order intake, with joint venture awards, such as a GBP160 million Sellafield nuclear facility contract and a GBP184 million smart-motorway upgrade scheme for the M60 and M62.
The London-headquartered company said it has clear plans for developing rather than partially eliminating the UK construction business, including achieving future cost savings where 100% of the benefits achieved would accrue to its shareholders.
Balfour Beatty believes that any reduction in revenue in the UK construction services business would create unacceptable operational and financial risks. The company said it would also incur cash outflows of many hundreds of millions of pounds of restructuring costs and working capital.
"In light of these considerations on the revised proposal, 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 Beatty said in its statement Monday.
Nonetheless, Carillion said Thursday that it continues to believe in the "powerful strategic logic" and financial benefits of a merger with Balfour Beatty and is therefore continuing to consider its position.
The company said it is confident that as a direct result of the merger, the cost base of the combined group could be reduced by at least GBP175 million a year by the end of 2016 and that earnings would consequently be significantly enhanced from that year.
These cost savings would represent a capitalised value of over GBP1.5 billion before any re-rating, Carillion said.
Based on initial discussions with banks and assuming the retention of Parsons Brinckerhoff, Carillion said it is highly confident that GBP3 billion of available funding would be accessible to the combined group, providing substantial headroom above its actual borrowing requirements after transaction costs and the costs of the proposed restructuring.
So the difference in opinion between the two companies boils down to this: Carillion wants to downsize a combined UK construction business and retain the revenue stream from Parsons Brinckerhoff, while Balfour Beatty wants to grow its UK construction business and shed what it considers a non-core US project management arm.
?The synergy prize is too big to walk away from, with Carillion confident of achieving at least GBP175 million," analysts at Liberum Capital said Thursday. ?We believe final synergies could be higher, perhaps GBP250 million. Egos aside, this deal should happen.?
Carillion now has until Thursday next week to make a final offer.
Carillion shares were quoted up 8.4% at 347.00 pence Thursday afternoon, while Balfour Beatty shares were quoted up 1.4% at 239.70 pence.
By Anthony Tshibangu; [email protected]; @AnthonyAllNews
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Related Shares:
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