Balfour Beatty, which is behind major projects such as the redevelopment of London's landmark Battersea power station, aborted the days old talks with Carillion at the end of July blaming its "wholly unexpected" demand that it hang on to Parsons Brinckerhoff, the US engineering and design business, it put up for sale in May. Balfour said retaining the US business was not part of the plan that was the basis for the talks and the change in terms was "not acceptable".
However it is understood that representatives of the two companies have met in a tentative attempt to broker a peace deal between the two sides. The board of Carillion, which maintains UK railways, roads and military bases, remains of the mind that there is a powerful strategic rationale for the deal that would create "very significant" shareholder value. It is not thought to have changed its stance on the sale of Parsons Brinckerhoff which it sees as a "jewel" in the Balfour crown. Under UK takeover panel rules Carillion has until the 21 August to make an offer for Balfour or walk away.
In May Balfour stunned investors when it announced plans to sell Parsons Brinckerhoff following concerns the $626m (£373m) acquisition had failed to deliver significant benefits. The sale, alongside the latest in a string of profit warnings, was accompanied by the departure of chief executive Andrew McNaughton with chairman Steve Marshall stepping up to run the troubled business. The turmoil created a window of opportunity for Carillion boss Richard Howson who approached it to discuss an all-share merger.
Balfour, which is the far bigger of the two companies with revenues of £10bn last year, has struggled since the financial crisis with a lack of building work in the UK and the cancellation of projects in Australia, where the company was forced to cut hundreds of jobs last year. Carillion, which last month revealed it was the preferred bidder to expand the main stand at Liverpool Football Club, has a turnover of around £4bn and a successful services division. The enlarged group would have a workforce of 80,000 with analysts predicting a tie-up would deliver £250m of cost-savings.
Balfour, which has issued four profit warnings in the last two years, is due to update the City on its half year results on Wednesday. Last month it warned investors of a £35m hit to profits after trading in its mechanical and electrical engineering division deteriorated with analysts now pencilling in a 17% decline in full year profits. There had been some speculation that the company would use the update to announce the sale of Parsons Brinckerhoff but that is thought to be wide of the mark with the sale process, although well advanced, entering its final round of bids. WS Atkins and WSP are thought to be among the interested parties.
Liberum analyst Joe Brent predicts the results will be "awful" with the company actually making a loss before gains from disposals are factored in, resulting in first half profits of just £26m. The company has been "failing to win contracts in its backyard", says Brent who points to the £600m Northern Line extension contract which the group missed out on. Nonetheless, Brent reckons the worst is over for Balfour: "We are near the end of the downgrade cycle if not passed it. The pipeline is growing and construction margins should recover from zero."
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