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Carillion-Balfour could create super-contractor primed for major project wins

The proposed merger of Carillion and Balfour Beatty could create a super-contractor primed to win major new nuclear and High Speed 2 (HS2) deals.

Two of the UK’s largest contractors by 2013 revenue last week revealed they were engaged in preliminary discussions in relation to a possible merger.

Andy Brown, analyst at broker N+1 Singer, told NCE the proposed merger between the two construction giants could create a company with the size and capability to take on deals usually reserved for consortiums.

This could give them a competitive advantage over purpose-built teams such as those that have scooped work on recent mega-schemes such as Crossrail.

“Carillion-Balfour would become a ready-made consortium,” said Brown.

“It should become attractive to clients because it will be under one roof so have much more consistent bid teams and site teams [than purpose-built teams].

“It might mean the merged company can go after big contracts. When new nuclear spend gets going, and HS2, you would expect this company to be at the forefront.”

Brown said news of talks between the two companies came as a shock to him – as it did to most in the industry.

“I was surprised as Carillion has been reducing its UK construction exposure and working more in support services,” said Brown.

“But if you ignore recent history there is a good fit. On paper it looks a great deal to become one company with a breadth of strengths. It would have access to a far wider client base and the potential to win more work.”

He said the two companies had complementary strengths.

Balfour boasts a large construction division, while Carillion brings a wealth of support services work. Balfour is strong on large infrastructure projects; Carillion in general building. Balfour works heavily in the US; Carillion in Canada.

“There will, however, be overlap,” said Brown. “For the deal to work there will have to be synergies, which unfortunately will be offices and people. We are likely to see job cuts.”

Cenkos Securities analyst Kevin Cammack said such job cuts could be widespread and the combined firm could actually chase less work than the two individual companies currently do.

“This is not really a merger at all,” he said. “Carillion is in the box seat, being fairly opportunistic.

“I think Carillion is looking at what costs it can take out from the businesses. The more it is prepared to let revenue drop, the more cost savings it can make.”

Cammack said the Wolverhampton-headquartered contractor may look to benefit from Balfour’s overseas success.

“Balfour Beatty has a significant North American business and an Asian presence so Carillion may seek to benefit from these.

“But they will look for cost synergies in the UK. I would expect quite a lot of job losses between the two groups.”

The proposed deal could see Balfour Beatty and Carillion form a super contractor. 2013 revenues saw the firms bring in £8.7bn and £3.3bn respectively when the firms’ joint venture revenue is taken out of the equation.

But neither analyst believed there would be a major impact on other UK construction companies if the merger went through.

Brown said: “It should not change anything for the wider industry because Balfour Beatty has always been a big player in the UK.

“The merged company might win more work abroad, and this may create opportunities for UK consultants that work with them, but not really for suppliers as there is usually local delivery.”

He added that some of Carillion’s rivals may be looking at putting in their own bids for Balfour Beatty.

“There will be other firms looking at what may be the alternative to this deal,” he said.

“Others might come in for Balfour, although there are not a lot of obvious contenders due to its size.”

He said other firms may look to create their own, separate mergers, but that this was going on regardless of the Balfour-Carillion talks.

“There has been a reasonable amount of activity recently with Galliford Try buying Miller Construction; Kier taking over May Gurney; Ferrovial and Enterprise; and Aecom acquiring URS,” he said.

“There is scope for other things to happen but this is not the domino to push the others into action.”

One City source told NCE that Carillion and Balfour Beatty may not be as closely aligned as they initially appear.

“This looks very much an opportunistic move from Carillion,” he said. “It’s in the driving seat

“There will be a fair few synergies but maybe not as many as people think because Carillion has been moving out of UK construction.

“A lot depends on how the deal is structured but it’s worth noting that despite Balfour having a bigger turnover, it’s profitability that counts and that’s why Carillion can make this move.”

Carillion and Balfour Beatty said last week that their boards believed the merger of the two groups had the potential to create a market leading services, investments and construction business of considerable depth and scale.

Work was underway to develop a strategy and outline business plan for a combined entity, they said, underpinned by the evaluation of achievable synergies, future financing arrangements and a number of other essential supporting workstreams.

The two parties agreed that Balfour Beatty’s publicly announced sale process for Parsons Brinckerhoff, which is already underway, would proceed unaffected by the announcement, subject to achieving acceptable value and terms.

A decision as to whether the firms intend to proceed with a merger will be made by 21 August.

Turbulent times

Balfour Beatty has had a wretched year.

Chief executive Andrew McNaughton resigned in May amid a series of announcements from the firm.

A £30M shortfall was identified in the contractor’s UK construction business, as it admitted group pre-tax profits could be significantly lower than previous expectations. The firm also said it was considering selling consultant Parsons Brinckerhoff, which it only acquired in October 2009.

These damaging revelations came just two months after Balfour announced that its pre-tax profits fell a massive 78% to just £32M for the year ending 31 December 2013. The contractor blamed the UK construction market and operational issues combined with a downturn in Australia.

It spoke then of the hope for progress in 2014 but as recently as July it was forced to admit finding a further £35M black hole, in its troubled Engineering Services business.

Balfour Beatty Construction Services chief executive Nick Pollard told NCE in July: “This is all the stuff that we can see. Who knows what will happen tomorrow? We could get a curve ball – either positive or negative – and if we do, we have to tell the City.”

Aside from its financial woes, Balfour hit the headlines when it admitted finding evidence of “localised bullying” while carrying out an investigation into allegations of improper conduct on a utilities contract.

The big deals have continued to come in, however, with Balfour winning a major job at Sellafield and a £130M M3 scheme in the last month alone.

Meanwhile Carillion had its own difficulties to overcome, posting a drop of 13% in pre-tax profits for the calendar year 2013.

Revenue fell by 7% in the same period as the contractor scaled down its UK construction activities in line with the recession, and restructured its energy services business.

Carillion had a high profile success story in early July, though, securing a £75M deal to expand the Main Stand at Liverpool Football Club’s famous Anfield stadium. ENDS (1220 words)

 

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