Carillion and troubled Balfour Beatty have shocked the industry with the news that the two businesses are in detailed talks over a possible merger.
Carillion, with a turnover of £4.1bn in 2013 compared to Balfour Beatty’s £10.1bn, has steered a much more successful course recently – winning a string of UK and overseas contracts and seeing its share price rise by 13% in the past 12 months and growing its market capitalisation to £1.45bn.
Balfour Beatty, on the other hand, after a string of four profit warnings in the past two years and the ousting of chief executive Andrew McNaughton, has seen its share price decline and market capitalisation drop to £1.6bn.
The two business are similar in terms of headcount, with both claiming 40,000 employees worldwide. Both have operations in the Middle East and Canada, with Balfour Beatty additionally present in Australia, Southeast Asia and South Africa.
According to a statement posted on the websites of both companies, “the boards of Carillion and Balfour Beatty believe that the merger of the two groups has the potential to create a market leading services, investments, and construction business of considerable depth and scale. Work is now underway to develop a strategy and outline business plan for a combined entity, underpinned by the evaluation of achievable synergies, future financing arrangements and a number of other essential supporting workstreams.
“The boards of Carillion and Balfour Beatty believe that the merger of the two groups has the potential to create a market leading services, investments, and construction business of considerable depth and scale.”
“In evaluating the merits of the merger, the two boards will, inter alia, wish to be satisfied that such a merger would lead to very significant value creation for the benefit of both sets of shareholders.”
Reuters reports that City traders welcomed the move, with Carillion shares up 12% at 380p by 07.38am, making it the top FTSE 250 riser. Balfour Beatty shares were up 11% at 259p.
Although the deal being proposed is a merger rather than a takeover, commentators point out that mergers tend to result in one business gaining the upper hand.
Speaking to the Financial Times, Stephen Rawlinson, an analyst at Whitman Howard, said: “It would take a few disposals and much hard work to create shareholder value. Mergers usually do not work: one guy eats the other’s lunch and the parties need to accept that.”
Carillion’s most recent contract win was being selected as the preferred bidder to deliver a £75m project for Liverpool Football Club.
It has also recently made a return to the housebuilding sector, where it is able to make substantially higher margins than in contracting. Housing project wins include the £400m first phase of the Battersea Power Station redevelopment, a twin tower development in Docklands and two innovative forays into custom housebuilding.
But it had its fingers burned over exposure to the Green Deal and ECO markets. In its 2013 annual results (to 31 December) it was forced to announce a restructuring of its UK energy services to reflect lower expectations for these workstreams.
