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Merger hits brick wall as Balfour Beatty rejects Carillion's new offer

Balfour Beatty has rejected Carillion’s improved offer and will not seek an extension to the put up or shut up deadline for a merger tomorrow.

In its latest statement to the City, Balfour Beatty said it had consulted with major shareholders and concluded that the revised offer failed to address key concerns.

Balfour Beatty said the proposal represented just a £55m increase in the value of the deal to its shareholders (see box for full breakdown).

The key concerns were the “considerable risks” associated with the proposed merger, notably the approach by Carillion to reduce construction to a third of any merged company when “UK Construction business is poised to benefit from a recovery in the market”, and Carillion’s intention to terminate the sale of Parsons Brinckerhoff when the sale is said to be close to reaching a “successful conclusion”.

Balfour Beatty said: “Therefore the board will not be seeking an extension to the put up or shut up deadline of 5pm on 21 August 2014.”

It added that the revised proposal by Carillion yesterday represented “only a small value change in the terms compared to the proposal from Carillion rejected on 11 August 2014”.

Analyst Liberum said: “The saga has reminded the market of the value potential within Balfour Beatty: the PB disposal is progressing well, the investment portfolio is likely to be revalued upwards and the bigger prize remains to improve construction margins from zero into a recovery.”

Carillion had yesterday afternoon announced to the City that it had made a new merger proposal to Balfour Beatty that offered shareholders a 36 per cent premium and valued the business at a total of almost £2.1bn.

Carillion had offered Balfour Beatty shareholders a 58.268 per cent share in the combined business, as well as a cash dividend of 8.5p per share.

The cash dividend was worth £59m in total and the new proposal represented a premium of 36 per cent on Balfour Beatty’s one-month volume weighted average price, prior to their original joint announcement on 25 July.

Carillion said Balfour Beatty had previously agreed to a 56.5 per cent share for Balfour Beatty shareholders, valuing the business at £1.886bn.

Carillion chairman Philip Green said: “Given the scale of the prize for shareholders of both Balfour Beatty and Carillion from a merger of the two companies, the board of Carillion remains committed to moving forward in a constructive and collaborative way with the board and management of Balfour Beatty to create a world-class business and very significant value for the shareholders of both companies.”

The deadline imposed by the Panel on Takeovers and Mergers for Carillion to announce a firm offer, or to announce that it does not intend to make a firm offer, is currently 5pm tomorrow.

In order for discussions to continue and for mutual due diligence to be concluded, Balfour Beatty must request that the Panel on Takeovers and Mergers extend this deadline.

Carillion said from the time of full re-engagement by Balfour Beatty, it would expect to be in a position to announce a firm offer for Balfour Beatty within four weeks.

The Proposed Offer/ Premium/ Balfour rejection

Carillion’s revised proposal is as follows:

  • All-share merger of Carillion and Balfour Beatty;
  • 58.268% share for Balfour Beatty shareholders based on the current undiluted ordinary share capital of each of Balfour Beatty and Carillion;
  • In addition to the interim dividend announced by Balfour Beatty last week and to the 2014 final dividend to which shareholders of the combined group would be entitled, Balfour Beatty shareholders to receive an additional cash dividend or equivalent of 8.5 pence per Balfour Beatty share (£59m in total);
  • Leadership team of Richard Howson, CEO; Richard Adam, CFO; and Philip Green, chairman;
  • Three Balfour Beatty non-executive directors to join the board;
  • Enlarged group to maintain Carillion’s progressive dividend policy;
  • Senior management team below board level to be drawn from both companies; and
  • Remaining Parsons Brinckerhoff bidders’ reasonable costs to be covered by Carillion in the event the merger goes ahead (up to £10m in aggregate).

Premium

Carillion’s improved offer represents a premium of:

  • 36% to the one-month Volume Weighted Average Price prior to 24 July 2014, the trading day immediately preceding the joint leak announcement;
  • 30% to the closing share price on 24 July 2014; and
  • 22% to the closing share price on 18 August 2014.

Balfour Beatty reasoning for rejection:

The firm says the revised proposal from Carillion represents an increase in value of £55m compared with the proposal rejected on 11 August 2014 on the basis set out below.

In Carillion’s announcement on 19 August 2014, the pro forma market capitalisation of Balfour Beatty is calculated by reference to the new shares issued by Carillion and Carillion’s closing share price as at 18 August 2014.

Balfour Beatty shareholders will also receive the proposed cash dividend of £59m. On this basis, Carillion calculates a total equity value offered for Balfour Beatty of £2.086m.

Balfour Beatty said Carillion’s proposal implicitly assumes that the market capitalisation of the pro forma combined group increases as the number of Carillion shares issued increases.

It added that Carillion’s methodology does not take into account the impact of the proposed dividend payment on the pro forma market capitalisation, which would be funded 58.268 per cent by Balfour Beatty shareholders.

An alternative methodology is set out below which takes into account these factors:

  • The combined market capitalisation for the proposed combined business is £3,162m based on adding together the market capitalisations of Balfour Beatty and Carillion (based on closing prices as at 18 August 2014).
  • This combined market capitalisation is then reduced by the proposed dividend payment of 8.5p per Balfour Beatty share (£59m in total), to £3,103m.
  • Based on Carillion’s revised proposal, Balfour Beatty would receive 58.268% of this combined market capitalisation. This equates to £1,808m, equivalent to 262p per Balfour Beatty share.
  • The total value to Balfour Beatty shareholders should include the proposed dividend of 8.5p. On this basis, the total value to Balfour Beatty shareholders increases to £1,867m, equivalent to 271p per Balfour Beatty share.

Using the same methodology, the total value to Balfour Beatty shareholders of the proposal rejected on 11 August 2014 is £1,812m, equivalent to 263p per Balfour Beatty share. The revised proposal therefore represents a value uplift of £55m.

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