Carillion pushes further for Balfour Beatty merger

Construction firm claims move would see £175mn in cost savings

Madinat Jumeirah.
Madinat Jumeirah.

British construction firm Carillion (CLLN.L) told Balfour's shareholders a merger would deliver £175mn in cost savings a year.

Balfour Beatty has rejected two takeover proposals by Carillion to create a £3bn group better placed to compete for major international contracts. Carillion now has until 21 August to make a final offer.

The two companies revealed in July they were in talks, but Balfour walked away only days later after Carillion insisted it cancel the planned sale of its U.S. engineering and design business Parsons Brinckerhoff.

Carillion and Balfour Beatty had announced on 24 May that they were in talks to create what both boards described in a joint statement as a company with “the potential to create a market-leading services, investments and construction business of considerable depth and scale”.

At the time, the pair said the deal would not affect Balfour Beatty's plan to sell off its Parsons Brickerhoff business.

However, last week Balfour Beatty called off talks when Carillion decided that the deal should only go ahead if the sale process was halted and the business retained.

But Carillion remains undeterred. On Thursday it issued a summary of the arguments it had taken to Balfour's big shareholders this week at the request of the Takeover Panel.

It said it could save more than £175mn a year by the end of 2016, more than some analysts expected, by streamlining offices, supply chains and IT.

The synergies were worth more than £1.5bn in stock market value, before any re-rating, it said.

It also said it would give Balfour's shareholders an additional cash dividend of 8.5 pence a share.

Balfour said it had "serious reservations" about whether the synergies could be achieved.

It said shareholders would benefit more from its own plan to develop its British construction business rather than Carillion's ambition to scale it back, and it was too risky to end the process of selling Parsons Brinckerhoff.

"The Board is confident that pursuing its strong independent strategy based around a recovering UK business, growing U.S. market and significant investments business is more attractive than a merger on the terms proposed," it said.

Carillion said it would overhaul Balfour's British construction business along the same lines as it rescaled its own activities by taking a more selective approach to bidding on contracts and growing its services.

The company said on Thursday that restructuring helped it post a 3% rise in first-half underlying pretax profit of £75.9mn on slightly lower revenue of £1.87bn. It said it was still targeting revenue growth for the full year, for which its expectations were unchanged.

Both contractors have an active presence in the GCC. Carillion has a joint venture with Al Futtaim in the UAE and Saudi Arabia and trades as Carillion Alawi in Oman. It is currently working on the Phase IV expansion of the Madinat Jumeirah resort in Dubai and the Aldara Hospital and Medical Center in Riyadh.

Balfour Beatty, meanwhile, has a joint venture in Dubai with Dutco which is currently working on the expansion of the Dubai Mall project for Emaar Properties, and Parsons Brinckerhoff is joint project manager of the $7bn Saudi Landbridge project.

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