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Balfour Beatty's; brave new World

BICC is set to dump its cable roots. Is merger now the way forward for Balfour Beatty?

Not so very long ago, the question in the City was: When would BICC, the electrical and telecom cable business, dump its beleaguered construction arm Balfour Beatty? Now BICC is seeking shareholder approval to sell off all its cable activities to leave Balfour Beatty's construction, maintenance and engineering operations at the heart of the business.

Strange, but not that surprising. The cable market has been declining for the last two to three years and competition has been growing. Turnover of the cable operation has fallen from £2.56bn to £1.5bn since 1995. Margins have dropped from 5% to 1.3%. BICC has already off loaded its under performing Metal Manufacturers telecoms cable business last year.

A recently rejected takeover bid by Wassall valued the firm at just £464M. While analysts accept this as quite low - Balfour Beatty alone is reckoned to be worth around £400M - they point out that in 1995 BICC was valued at £1.6bn. The fall in value is 'one of the sorriest stories on the UK stock market' as the Financial Times put it.

Nevertheless, it is interesting to see Balfour Beatty at the centre of the recovery strategy. After all, Balfour Beatty is not exactly a City darling either. This year's results show Balfour Beatty returning an operating profit of just £61M on a turnover of £2.1bn, and operating margin of just 2.85%.

That said, the business is in dramatically better shape than it was in 1995 when it made just £18M from a £1.7bn turnover, or 1996 when it took £10M from a £2.1bn turnover.

Restructuring under Mike Welton's control with a greater focus on selective bidding for higher margin work, Private Finance Initiative projects and its blossoming rail sector activities have all contributed to this upturn.

But as many City analysts quickly point out, there could also be a significant contribution from the natural cyclical nature of construction work - there just happened to be better work around over the last few years.

Certainly the remaining business - now comprising Balfour Beatty's construction, maintenance, engineering and capital projects arms plus Andover Controls, the computer systems installer, and Brand-Rex the telecoms wiring specialist - has to regroup. Balfour Beatty's management will no doubt be thrust under the spotlight to make an even greater contribution to the new look business. Being re-listed on the stock market under 'construction', rather than 'electricals', will put the firm under the gaze of a new group of analysts who will be able to more easily compare its performance, like for like, with its competitors.

The first question will be what to call the firm. Adopting the Balfour Beatty name looks favourite.

That done, it will have its size to worry about. Without the cables businesses behind it Balfour Beatty may be considered to lack financial muscle on the world construction market. Of course, the deal with General Cable will remove debt from the firm and its ability to raise cash will continue to be a function of performance and reputation.

However, many analysts predict that, given the current fragmentation and over-capacity of the construction market, Balfour Beatty will take the opportunity to strengthen its position through acquisition or merger.

And there are firms out there ready to do business. Tarmac's construction activities have got to be the prime target after last month's decision to split from the aggregates division.

There is some overlap in the civils businesses but a tie-up would give Balfour Beatty a much stronger footing in the building market. And if Sir Neville Simms is looking for a strong name for his new company, he need not look any further than Balfour Beatty.

Similarly Bovis is about to be floated free from parent P&O. This again would give access to the building market and bolster Balfour Beatty's project management and asset management capabilities. Then there is Cleveland Bridge, the specialist and well respected steel fabrication business about to be dumped by Kvaerner. This could also be an excellent addition to Balfour Beatty's major projects division armoury.

All this, of course, assumes that the deal to sell the cable businesses to General Cable goes through. Shareholders are expected to be called to an extraordinary general meeting at the end of this month ahead of the AGM on 5 May, and the feeling is that they will support it. That bridge crossed, a brave new world awaits.

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