Balfour Beatty has warned shareholders the group could be at risk of financial default if they fail to approve the sale of Parsons Brinckerhoff.
In a circular issued to shareholders, Balfour Beatty chairman Steve Marshall warned that Balfour Beatty would “have less headroom on net debt to EBITDA covenants given as part of its funding arrangements” without cash proceeds from the sale of the consultancy business.
Balfour Beatty announced it had agreed the sale of Parsons Brinckerhoff to Canadian firm WSP Global for a cash consideration of £820m on 3 September, but the transaction remains dependent on shareholder approval.
If the sale is approved, up to £200m of the cash proceeds would be returned to shareholders through a share buyback programme, while £85m would be used to reduce its pension fund deficit and the remaining balance would be retained to boost Balfour Beatty’s balance sheet.
Without the cash proceeds, however, Balfour Beatty could be at risk of failing to meet its covenants and defaulting on its banking agreements if there was a further reduction in profitability, the circular said.
On 29 September, Balfour Beatty issued a fresh £75m profit warning, its fifth such warning in less than two years, made up of shortfalls across the UK construction business.
The letter to shareholders said Balfour Beatty’s banking and other financing arrangements contain covenants, such as the ratio of the group’s EBITDA to its net debt, which may become more difficult to meet.
“If the transaction does not proceed and there is a further modest deterioration in the profitability of the group, the board will need to consider alternative ways of raising and/or conserving cash and improving EBITDA, in order to strengthen the balance sheet, to provide additional liquidity and provide sufficient headroom for covenant purposes,” it said.
“A failure of the group to meet its covenants, in the absence of agreed waivers, would constitute an event of default for the purposes of the Principal Financing Documents. An event of default would prevent the Group from drawing-down on its facilities.”
Equity analyst Anthony Codling at Jefferies said: “In our view shareholders should not approve the proposed sale of Parsons Brincherhoff. We believe that the timing of the sale could not be worse and there are real risks that the eventual shareholder return may fall significantly short of the £200m target. In our view, the focus should be to use PBs cash generation to accelerate the turnaround of the core business.”
Balfour Beatty would accelerate the disposal of investment assets to reduce the risk of defaulting if necessary, the letter added.
Shareholder approval of the resolution to sell Parsons Brinckerhoff will be sought at a general meeting on 28 October.
After the sale of Parsons Brinckerhoff, Balfour Beatty will refocus as an Anglo-American construction and specialist services group, it said.