Carillion and Balfour Beatty in preliminary merger talks

Move would create £3bn contractor to compete with international giants.

Announcement by Carillion and Balfour Beatty last week that they were in exploratory merger talks was welcomed by the city, with shares in the contractors rising 10% and and 8.6% respectively just after the move was announced.

Rumours of a big contractor merger had been swirling around the industry for a couple of weeks even though reports are that this is not the one that was anticipated. 

However news reports flushed out a joint statement from the Carillion and Balfour Beatty boards after the stock market closed last night.

"Merger could be seen as a defensive strategy by the two of Britain’s major contractors to protect their market and prevent themselves being marginalised in their own territory by international giants."

The statement confirmed that Carillion had approached Balfour Beatty with a merger offer to create a £3bn plus business combining the strengths of two leading UK companies. The approach came shortly after Balfour Beatty announced a £30M profit warning and chief executive Andrew McNaughton left the business in May. A subsequent £35M profit hole has added to the contractor’s problems though year end figures will still be in line with expectations the company has said.

According to the statement the boards of both firms “believe that a merger of the two groups has the potential to create a market leading services, investments and construction business of considerable depth and scale”. Balfour Beatty’s sale of Parsons Brinckerhoff which is already underway will continue.

The merger will only go ahead if due diligence is concluded to both parties satisfaction and could be recommended to shareholders. A firm decision to merge or not has to be announced by 21 August.

Like AECOM/URS this merger move is being made by the smaller of the two parties. Carillion’s turnover is around the £4bn while Balfour Beatty’s is £10.1bn. But market capitalisations are closer with Carillion’s being £1.4bn compared to Balfour Beatty’s £1.6bn.

Both firms are aware that though they are among the giants of UK contracting, on an international scale they are outside the top 10 worldwide. As investment in infrastructure round the world ramps up, size, balance sheet and critical mass matter if contractors want to win the big jobs.  European rivals such as Vinci and Ferrovial are reporting revenues of £30bn and £6.8bn.

The £383bn National Infrastructure Plan and general focus on infrastructure investment in the UK is a huge magnet to overseas competitors.  Spending on transport infrastructure alone is growing at 14% per annum.

Merger could be seen as a defensive strategy by two of Britain’s major contractors to protect their market and prevent themselves being marginalised in their own territory by international giants.

It could also be a protection against hostile takeover; Chinese firms in particular are known to be eyeing the UK and looking to buy their way in. And the revelation that merger talks are underway might prompt rival bids for Balfour Beatty in the coming days or weeks. 

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