黑洞社区

A proposed merger between Carillion and Balfour Beatty has a 鈥�50/50鈥� chance of going ahead but if successful the deal could dramatically transform the UK construction market, analysts have said.

Analysts reacted with surprise to the news, , that the two firms were in 鈥減reliminary discussions in relation to a possible merger鈥�.

Balfour Beatty, with turnover of 拢10.1bn, and Carillion, with turnover of 拢4.1.bn, are the UK鈥檚 two largest contractors, occupying the top two spots in 黑洞社区鈥檚 latest Top 150 contractors table.

Both firms鈥� share price rose around 10% on the news today.

Kevin Cammack (pictured), analyst at Cenkos, said he was 鈥渟urprised鈥� by the news of the talks. He said Carillion had told analysts that it had first approached Balfour Beatty around 8 weeks ago and has 鈥渁lready engaged in preliminary due diligence and sounded out financing packages鈥�.

He said he viewed the proposal as 鈥渁n opportunistic take over鈥� of Balfour Beatty, rather than a merger.

He said if the merger went through it was 鈥減ossible鈥� it could herald the end of Balfour Beatty as a giant of UK construction.

He said Carillion has been downsizing it main contracting business and would likely do the same with Balfour Beatty if the deal went through.

He said: 鈥淐learly Carillion do not want to be a major contractor, they have spent years trying to grow the services side and halving the construction business.鈥�

He said the only way for Carillion to achievethe required 鈥渟ynergies鈥� would be to cut back costs in Balfour Beatty鈥檚 UK construction business, as there was limited scope to achieve cost reductions overseas.

鈥淲here the big money comes out is on the construction side of things,鈥� he said.

He added that he only gave the deal a 鈥�50/50鈥� chance of going through.

鈥淚t boils down to two things. Can Carillion satisfy themselves the risks are sufficiently measurable to give you confidence that you can crystallise the savings to give you value?

鈥淭here鈥檚 a point at which the due diligence may stop you thinking you can do that.鈥�

He said because Carillion was the smaller of the two firms, the key was whether the Carillion board could convince shareholders they would get good value out of the deal when they were likely to 鈥渆nd up with less than half of the equity of the combined business鈥�

He said Carillion鈥檚 record on achieving a return of 鈥渙ver 10%鈥� on its investments in the acquisition of engineer Mowlem in 2005, contractor Alfred McAlpine in 2008, and solar energy installer Eaga in 2011 had been mixed.

In a briefing note, analyst Liberum said discussions we like at 鈥渁 very early stage鈥� and a deal would likely wait until the outcome of the Parsons sale.

鈥淲e would not expect a 鈥榤erger鈥� to complete until the end of this year at the earliest,鈥� the analyst said.

Liberum said there was a 鈥渉uge overlap鈥� between the business, both in geography and markets and there was potential for 拢250m in synergies.

The firm said other bidders for Balfour Beatty could include Hochtief, Vinci and Bouygues.

鈥淗owever, none would have the same geographical and business overlap as Carillion and could not replicate the synergies,鈥� Liberum said.

Analyst Joe Brent at Liberum said there were three options for a possible deal: Carillon buys Balfour Beatty; the two firms merge; or Carillion 鈥渞everses into鈥� Balfour Beatty.

He said the 鈥渓ast two options are less likely鈥�.

He said if Carillion ended up buying Balfour, it was likely that current Carillion chief executive Richard Howson would assume the role of chief executive of the merged company, and Carillion鈥檚 finance director Richard Adam continuing to head the newly merged firm鈥檚 finance department.

He said Carillion had a strong position, given a number of recent major contract wins, such as five of the Ministry of Defence鈥檚 recent Next Generation Estates Contract awards, which together are worth up to 拢4.5bn.

鈥淐arillion comes from a position of strength, given its operational excellence and recent contract momentum.鈥�

He added: 鈥淐ontractor consolidation has always been compelling since margins are typically low, but synergies high. 鈥淐arillion鈥檚 experience and centralised management makes it an excellent integrator.鈥�

Andrew Gibb, analyst at Investec, said it was 鈥渋nevitable鈥� that Balfour Beatty would be bought following its move to sell consultant Parsons Brinckerhoff.

He said if the firm did not end up merging with Carillion it would likely be bought by another firm, adding that French giant Bouygues or Chinese firms could also be possible buyers.

He added he 鈥渨ould not be surprised鈥� if the Competition Commission wanted to run the rule over any merger.

He added: 鈥淸Carillion and Balfour Beatty] are already the big boys, although Carillion less so, they would be a force to be reckoned with.鈥�