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Carillion would downsize Balfour construction business

Carillion would radically cut back Balfour Beatty’s construction business, should the mooted merger between the two firms proceed.

The firm said it would “refocus significantly the UK construction services business in a similar manner to the rescaling it undertook in respect of its own construction business, principally through focus on contract selectivity”.

Carillion added it would grow the services business so that, “within the medium term, two thirds of the combined group’s operating profit would derive from services and investments with one third coming from construction.”

Currently, construction accounts for two-thirds of Balfour Beatty’s revenue.

Balfour segementation

Carillion has been in talks since 11 August with a number of Balfour Beatty’s major shareholders, to discuss its plans should the two construction giants merge.

It has identified £175M of cost savings it would make in a merged company. The firm said its board is “confident that, as a direct result of the merger, the cost-base of the combined group could be reduced by at least £175M a year by the end of 2016,  and that earnings would consequently be significantly enhanced from that year.”

Carillion has identified synergies in the following areas:

  • Back office, head office, business and support functions, and “applying Carillion’s business operating model to Balfour Beatty’s UK business”;
  • Purchasing and procurement efficiencies;
  • Using Carillion’s outsourced back office ICT solution, plus standardisation of systems and processes;
  • Consolidation of the two groups’ property portfolios in overlapping areas, including head office; and
  • Agency labour, fleet, insurance, and general overhead savings.

Carillion said it expects 40% of the synergies would be achieved by the end of 2015, and 100% by the end of 2016 – if the merger occurred by 31 December 2014.

Delivering the synergies would result in exceptional cash costs of approximately £225M, largely incurred in financial years 2015 and 2016.

Carillion revealed that after discussions with banks, and Parsons Brinckerhoff was not sold, it was “highly confident” that £3bn of funding would be accessible to the combined group.

Carillion added it “continues to believe in the powerful strategic logic and financial benefits of a merger with Balfour Beatty and is therefore continuing to consider its position”. The firm said it will will make a further announcement in due course.

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