Carillion releases details of Balfour Beatty deal after takeovers panel request

WOLVERHAMPTON-based construction and support services group Carillion has released details of the terms of its proposed £3bn merger with rival Balfour Beatty after being urged by the Takeovers and Merger Panel and BB’s major shareholders to make the discussions public.

Balfour Beatty rejected revised terms for the takeover earlier this week – despite Carillion’s offer to overcome a major stumbling block by buying out the sales process for BB’s disposal of its consultancy Parsons Brinckerhoff.

In a statement, the Carillion board said it was confident that “as a direct result of the merger, the cost-base of the combined group could be reduced by at least £175m per annum by the end of 2016 and that earnings would consequently be significantly enhanced from that year. These cost savings would represent a capitalised value of over £1.5bn before any re-rating”.

It continues: “Carillion has proposed that Balfour Beatty’s shareholders receive an additional cash dividend (or equivalent) of 8.5p per Balfour Beatty share (£59m in total) at the time Balfour Beatty’s final 2014 dividend would have otherwise been paid in 2015. This would be in addition to the final 2014 dividend they would be entitled to receive as shareholders in the enlarged group.”

It said it had also proposed that the enlarged group would maintain Carillion’s progressive dividend policy.

Carillion said that based on initial discussions with banks and assuming the retention of Parsons Brinckerhoff, its board was “highly confident” that £3bn of available funding would be accessible to the combined group, providing substantial headroom above its actual borrowing requirements after transaction costs and the costs of the proposed restructuring.

“Carillion’s envisaged business plan for the group is to 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, and to grow its services business, such 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,” it said.
 
“The business plan envisages that overall, the combined group’s UK revenue would rise through the period, providing a cost base against which the synergies would be achieved.”

Before discussions between the two parties ended, mutual due diligence had included meetings with management and divisional management heads, meetings with auditors, sharing of data and information exchange through an electronic data room, reviews of recent trading, reviews of longer term standalone business plans, the evaluation of the achievability of synergies and the evaluation of future financing arrangements.

It summed up its position by saying: “Carillion 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 group has until August 21 to make its position clear.

The statement coincided with Carillion’s own half year results, which showed that in the six months to June 30, 2014 revenue was down 5% to £1,871m (2013: £1,964m). Underlying profit from operations was up 6% to £97.4m (2013: £92.3m) and operating margin rose from 5.1% in last year’s H1 to 5.5%.

Underlying pre-tax profit rose 3% to £75.9m (2013: £73.5m) and earnings per share were flat at 14.7p. Nevertheless, it is proposing an interim dividend of 5.6p per share (2013: 5.5p), a rise of 2%.

Carillion chairman, Philip Green said: “Carillion continues to perform in line with the board’s expectations, reflecting the benefits of the early actions we took in response to the economic downturn, notably the planned rescaling of our UK construction business, together with our continuing strong work-winning performance.  

“Having realigned our businesses to the size of the markets in which we operate, the group is well positioned to benefit from its strong work-winning performance over the last 18 months and from its high-quality pipeline of contract opportunities across our target markets.”

Consequently, he said the board’s expectations for 2014 remained unchanged and it expected  to make further progress in the medium term.