WET News

6 WET NEWS AUGUST 2014 Left and below: wBoth Carillion and Balfour Beatty share a lot of synergies, as analysts say contractor consolidation 'is always compelling' Will two become one? • Balfour Beatty and Carillion are talking about merging but analysts believe the discussions will end in a takeover. Maureen Gaines reports. B y August 21 it will become clear whether Carillion and Balfour Beatty are to merge or not. That is the date by which both companies, which have activities in the UK water sector, must announce either their plan to merge, or to go their separate ways. If they go ahead with a merger, the result will be a con- struction services giant valued at more than £3B and with a combined revenue of £14B-plus. In a statement announcing they were in discussions, Bal- four Beatty and Carillion said they believe the merger of the two groups "has the potential to create a market leading ser- vices, investments and con- struction business of considera- ble depth and scale". They are now developing a strategy and outline business plan for a combined entity, underpinned by the evaluation of achievable synergies, future financing arrangements and a number of other essential sup- porting work streams. And, of course, a merger would have to benefit both sets of shareholders. Carillion is a leading interna- tional integrated support ser- vices company comprising four business segments – support services, Public Private Partner- ship, Middle East construction services, and construction ser- vices, excluding the Middle East. The group's Utility Ser- vices operation topped the sales per employee Top 10 table in our The Leaders 2014 supplement published last May with a figure of £384,300. Balfour Beatty is an interna- tional infrastructure group focusing on key markets cover- ing transportation, power and energy, water, and complex buildings (commercial and social). In this year's The Leaders the group led the Top 10 turnover table with a revenue of £8.7B. However, it has not all been plain sailing for Balfour Beatty. The group is still seeking a chief executive having sacked Andrew McNaughton in May as it issued a profit warning – its UK con- struction business expected to make a shortfall; and the mechanical and electrical engi- neering has been affected by adverse market conditions. In fact there have been four profit warnings in the past two years. The group is also in the pro- cess of finding a buyer for its Parsons Brinckerhoff subsidi- ary. Both Carillion and Balfour Beatty have stated that Parsons Brinckerhoff will proceed unaf- fected by the merger talks. One contractor said the announcement was interesting. He said that when you look at UK water sector, Balfour Beatty is "by far the bigger player of the two". The impact on the UK water sector, as it stands, would be limited. Howeverm that could change if consolidation continues and "choice becomes less and less". News of the talks surprised city analysts at the time of the announcement but reaction, generally, is that there are a lot of synergies between the two groups. However, there is specu- lation that Carillion will be in the driving seat and that its chief executive, Richard How- son, and chairman Philip Green will take the reins of a combined group. Joe Brent, analyst at Liberum, says the merger talks announce- ment "was deliberately vague" on the subject of the deal struc- ture. He is of the opinion that Carillion will buy Balfour Beatty. He says investors seem most interested in the synergies and the terms of the deal. "We still believe that £250M of cash 'syn- ergies' are achievable; although these are likely to include opera- tional improvements as well as scale benefits, and management may target a more conservative £150M initially. In addition, we would expect huge fair value adjustments." Brent views Carillion as being in the driving seat and will seek to maximise returns for its shareholders. However, in the unlikely but possible event that Parsons Brinckerhoff can- not be sold for a reasonable price, that will increase the equity that Carillion needs to contribute into the deal, making it more merger than acquisition. Contractor consolidation has "always been compelling" since margins are typically low, and Liberum says that other bidders could bid for Balfour Beatty. It cites Hochtief, Vinci and Bou- ygues as potential bidders, before saying they would not have the same geographical and business overlap as Carillion and would not be able to repli- cate the synergies. Cenkos Securities analyst Kevin Cammack said he believed Carillion's eyes are on a takeo- ver, rather than a merger, saying it is "an opportunistic takeover of Balfour Beatty". n YOU SAY "Clearly Carillion do not want to be a major contractor, they have spent years trying to grow the services side and halving the construction business. It boils down to two things. Can Carillion satisfy themselves the risks are sufficiently measureable to give you confidence that you can crystallise the savings to give you value? There's a point at which due diligence may stop you thinking you can do that." Kevin Cammack, analyst, Cenkos Securities "Would not expect a merger to complete until the end of this year at the earliest. Carillion comes from a position of strength, given its operational excellence and recent contract momentum" Joe Brent, analyst, Liberum "[Carillion and Balfour Beatty] are already the big boys, although Carillion less so, they would be a force to be reckoned with" Andrew Gibb, analyst at Investec News+

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