Analysts say Balfour has missed an opportunity after rejecting Carillion鈥檚 拢2.1bn revised offer for a merger
Balfour Beatty has been warned it has missed an opportunity after it rejected a sweetened merger offer from Carillion this week, prompting Carillion to call an end to its pursuit of its contracting rival.
Carillion had been courting Balfour Beatty since May, but the talks broke down after Carillion announced at the end of July that it wanted to keep Balfour Beatty鈥檚 consulting arm Parsons Brinckerhoff - which Balfour is currently selling - as part of any merged firm.
This week Carillion offered Balfour shareholders a 58.268% stake in the combined firm, an increase from its offer of 56.5% earlier this month.
Carillion also offered to pay Balfour鈥檚 shareholders 拢59m in cash, equivalent to 8.5p per share.
Carillion said its offer - the third it has made - valued Balfour Beatty at 拢2.086bn, compared to the 拢1.886bn it was valued at under its original offer, and well above Balfour鈥檚 current market capitalisation of around 拢1.75bn.
The 拢200m uplift in valuation was designed to counter the Balfour Beatty board鈥檚 pledge to return 鈥渦p to 拢200m of capital鈥� to Balfour鈥檚 shareholders from the sale of Parsons Brinckerhoff.
But Balfour Beatty rejected the offer on Wednesday (20 August), saying the proposed business plan contained 鈥渃onsiderable risk鈥� and the Parsons sale was 鈥渞eaching successful conclusion鈥�.
It added that Carillion鈥檚 offer was 鈥渙nly a small value change鈥� compared to the proposal from Carillion rejected on 11 August 2014 and disputed Carillion鈥檚 method for valuing Balfour Beatty.
Balfour said it calculated that Carillion鈥檚 offer valued the firm at 拢1.87bn, a 拢55m increase from the previous bid.
Balfour Beatty鈥檚 rejection of the offer prompted Carillion to call a halt to its pursuit, with Carillion now prohibited, under UK takeover rules, from making a fresh offer for Balfour Beatty within the next six months, unless Balfour Beatty鈥檚 board asks it to or a second bidder makes a firm offer for Balfour Beatty.
Stephen Rawlinson, analyst at Whitman Howard, said Balfour Beatty鈥檚 rejection of the offer was an 鈥渙pportunity missed鈥�. 鈥淭he share price will no doubt reflect that over the coming months,鈥� he said.
Andrew Gibb, analyst at Investec, said Carillion鈥檚 offer this week represented 鈥渁 healthy premium to where Balfour Beatty has been trading鈥�.
He added: 鈥淸The Balfour Beatty] board clearly think that they are able to deliver over and above that. The shareholders will hold them to that and if they don鈥檛 deliver there will be questions asked about them and their decision-making capabilities.鈥�
But the chief executive of a rival contractor, who preferred not to be named, said while much of the focus had been on how the proposed merger would have benefitted Balfour Beatty, Carillion had more to gain from a deal.
He said: 鈥淚t is popular to paint Carillion as the strong one and Balfour Beatty as the weak one.
鈥淏ut if you look at the huge expertise Balfour Beatty has, and the financial position it would be in after selling Parsons Brinckerhoff, then it looks like Carillion has a lot more to gain from this merger.鈥�
Last week both firms issued results for the first six months of the year, with Carillion posting a stable performance, while Balfour Beatty鈥檚 problems with its construction business continued (see graphic).
Balfour Beatty - Carillion: the analysts鈥� reaction
Stephen Rawlinson, analyst at Whitman Howard
Rawlinson said Balfour Beatty鈥檚 rejection was a 鈥渕issed opportunity鈥�. However, he said the process may 鈥済alvanise the management at Balfour Beatty to make changes that were not possible before, though to date the solutions we have heard to improving operations are not as radical as might be needed鈥�.
Andrew Gibb, analyst at Investec
Gibb said Carillion鈥檚 third offer was 鈥渢he last throw of the dice鈥�. But he said he still expected Balfour Beatty to do some sort of merger or sale in the near future. 鈥淭his is a business being dressed up for the shop window,鈥� he said. 鈥淭he board of Balfour Beatty are keen to dispose of Parsons Brinckerhoff and put a new valuation up for the investment portfolio to tempt in other bidders because the job in hand to turn around the UK construction business is significant and there will be further bumps in the road.鈥�
Andy Brown, analyst at N+1 Singer
Brown said the end of merger talks was most damaging for Balfour Beatty. 鈥淥bviously it鈥檚 a blow to Balfour Beatty because it鈥檚 back to them to deliver plan B or C or whatever iteration we鈥檙e on,鈥� he said. However, he added it did raise questions over whether Carillion鈥檚 move was 鈥減urely opportunistic鈥� or whether it wanted to pursue a merger in order to 鈥渕ask a potential problem鈥� with its business.
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