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Balfour Beatty has, again, set out is objections to Carillion鈥檚 proposed merger between the two contracting giants, which it says is 鈥渙pportunistic鈥�, with the contracting giant questioning Carillion鈥檚 ability to manage the combined firm.

In a statement to the City this morning, which follows an announcement from Carillion yesterday that set out the terms of the merger, Balfour Beatty said its board remained firm on its rejection of the deal.

Yesterday, Carillion set out its detailed plans for a merged business combining the two firms which included 拢175m of annual cost savings, which, when capitalised, would add 拢1.5bn to the value of the company combined entity.

Carillion said that should the merger go ahead, it would also seek to downscale Balfour Beatty鈥檚 UK construction business along the lines of its own construction business, which reduced in size by a third in the last three years, and refocus on support services.

Carillion鈥檚 move was designed to tempt Balfour Beatty shareholders and force Balfour鈥檚 management back to the negotiating table after two of its merger offers have been rejected.

Yesterday Balfour Beatty responded with a statement that said Carillion鈥檚 calculation that a merger between the two firms could create 拢1.5bn of added value was 鈥渋ncorrect鈥� and the merger posed significant risks.

Today the firm set out further its opposition to the proposal, saying that it still believed it was right for Balfour Beatty to sell its consultant arm Parsons Brinckerhoff, a process that is well underway.

Carillion鈥檚 change of heart over the sale of Parsons was the reason Balfour Beatty gave at the end of July for the collapse of the merger talks.

The firm said: 鈥淚n evaluating the proposed combination the Board also considered the right strategic approach to maximise value for shareholders.

鈥淭he Board believes this is the right time to sell Parsons Brinckerhoff, but believes Carillion鈥檚 approach for the entire Group at this stage of the construction cycle is opportunistic.鈥�

Balfour Beatty also questioned Carillion鈥檚 ability to manage the combined firm, which would have annual revenue of 拢14bn and around 80,000 employees, saying it would be 鈥渙f a significantly larger scale and diversity than the Carillion management team has previously managed鈥�.

鈥淭he proposed retention of Parsons Brinckerhoff exacerbates the scale of the challenge at a time when the management team would be undertaking a fundamental downsizing of the UK construction businesses,鈥� the firm said.

It added: 鈥淭he implementation programme would be complex, requiring simultaneous business restructuring, integration and outsourcing, at the same time as a significant IT change programme which is already under way.鈥�

Balfour Beatty said that the merger would involve reducing its UK construction business by up to two thirds, and 鈥渟uch rescaling would require a significant reduction in overheads, just to maintain current margins (equivalent to over 6% of the lost revenue)鈥�.

The firm added: 鈥淭his cost reduction will reduce the amount of available synergies that flow through to profitability. Cost savings driven by shrinking the business should not be confused with synergies.鈥�

鈥淭hese reductions in cost will reduce the amount of the 拢175m that could enhance profitability. A smaller UK construction business would have a lower addressable cost base, further reducing the potential synergies available from any transaction.

鈥淚ncremental value for shareholders can only be generated by increasing absolute profit and cash returns.

鈥淭aking into account the revenue reduction detailed above, the capitalised value of the synergies would be materially lower than the over 拢1.5bn suggested by Carillion.鈥�

The firm also said the merger proposal would limit the firm鈥檚 opportunity to benefit from the recovery in construction in the UK.

The firm said its troubled UK construction business was 鈥渂est placed to benefit from any recovery in UK construction, and is already showing signs of such a recovery鈥�.

Stephen Rawlinson, analyst at Whitman Howard, said Balfour Beatty鈥檚 statement today represented a 鈥渕ore considered rejection鈥� of the merger.

He said: 鈥淭he forthright tone and comprehensive nature of this long statement suggests that Carillion might as well back off.

鈥淎ny further move would have to be hostile and that is not what Carillion want to do. The Balfour Beatty rejection is based on a mixture of issues some of which are strategic and some of which are about Balfour Beatty management being able to manage costs a little better themselves.

鈥淭he firmness of the rebuttal of Carillion鈥檚 efforts to extend the conversation suggests to us that further efforts to engage will end in failure.

鈥淲e believe that is unfortunate as the combination of the two operations would have created a very strong business potentially in the FTSE100 and accelerated the managerial improvements that need to be made at Balfour, an issue on which both parties agree.鈥�

He said Balfour Beatty鈥檚 management had now put itself under pressure to demonstrate that it can get a good price for Parson Brinckerhoff and return 拢200m to shareholders, as well as 鈥渋mprove substantially its UK Construction operations by reducing costs and winning good projects鈥�.

He said the firm has also said it will realise further savings in overheads of around 1% of revenue and use the sale of PPP/PFI assets to bridge the gap in funding between now and when the operational performance improves.

He said: 鈥淐an Balfour Beatty management achieve what it has outlined this morning? The track record suggests that there have to be big doubts that it can improve performance.

鈥淚s the business that Balfour will create attractive? The notion that a construction company with an investments arm based in the UK and the USA is highly attractive is one with which we struggle.

鈥淭here is no doubt that in terms of the where we are in the current economic cycle the markets should provide a good platform for a number of years. It will however be a business confined to low margins over most of its activity and subject to cycles in the economy which it will have few means of mitigating.

鈥淭he business described by Carillion would have more stable revenue streams as a larger proportion of revenue would arise from long term services contracts.鈥�