It was inevitable, given recent developments at Balfour Beatty, that potential acquirers would look opportunistically at offering for all or parts of the business.
Balfour Beatty has recently endured multiple profit warnings, a strategy u-turn in terms of Parsons Brinkerhoff and the departure of top management.
Carillion’s approach needs to be examined in this context and in particular that, according to their announcement, there is still a considerable amount of work to be done in due diligence, business planning and identification of synergies.
The outlined proposal is for an agreed share for share merger; however, given the balance of proposed top management, I see this as a Carillion takeover of Balfour Beatty.
Now would appear to be a good time to buy.
The construction industry in Balfour Beatty’s core markets – not least the UK – is growing again, with both volumes and margins projected to increase over the foreseeable future.
“Balfour Beatty’s profit warnings indicate it does not have a strong enough handle on the value of its own contracts”
There may be multiple synergies in a merger of the two businesses, including, most obviously, back office/administration cost savings.
For example, in Kier’s 2013 offer for May Gurney, it estimated recurring cost savings of £20m (against May Gurney’s EBITDA at the time of £52m).
Additionally, areas of complementarity could bring a strong international portfolio of businesses and market leadership in a variety of the combined group’s activities.
Where the danger lies
The key area of risk, as with all contractor mergers, is in contracts currently under way.
In 2005, following the takeover of Mowlem, Carillion wrote off an additional £90m on problem contracts against a purchase price of £291m.
“Alternative transaction structures may be considered, such as Carillion offering for the parts of Balfours it really wants”
Balfour Beatty’s profit warnings indicate it does not have a strong enough handle on the value of its own contracts; I would question whether Carillion’s due diligence processes could do a better job.
The number of UK construction services deals has collapsed to a handful since 2007/08.
General contracting has seen very few significant deals over the past 10 years, with Carillion’s takeovers of Alfred McAlpine and Mowlem being notable exceptions.
How housing and FM stack up
Much more prevalent have been targeted in-fill acquisitions, such as Galliford Try’s recent acquisition of Miller Construction.
This contrasts with the consolidations of the UK housebuilding and facilities management or the global consultancy/engineering sectors, which continue at a pace.
In spite of the potential attractions of general contractor mergers, the reason for this lack of historic M&A activity may be summed up in the words of one CEO who once said to me, “Why should I buy someone else’s problems.”
This may lead to alternative transaction structures being considered, such as Carillion offering for the parts of Balfours it really wants.
Adrian Pritchard is a partner and construction merger and acquisitions specialist at Nash Fitzwilliams