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City Site - Birse fits well with Balfour Beatty

FINANCE

CONTRACTORS with significant UK regional operations seem to be in demand.

After Carillion's acquisition of Mowlem, Galliford Try's purchase of Morrison and Morgan Sindall's takeover of Gleeson MCL, Balfour Beatty has now joined the fray with an agreed offer for Birse.

The deal highlights the attractions of construction companies with significant regional market shares, particularly as decision-making on PFI contracts is increasingly decentralised. It will reinforce Balfour's position in UK civils, particularly in rail and water-related work in the north and marks another significant step in the consolidation of the quoted sector.

For Birse, the deal marks the end of a fairly undistinguished record as a public company and for its shareholders the sale probably represents the best exit. While it has a good record for winning work, the company has been prone to losses and has rarely managed to generate healthy margins on its £340 million turnover. The shares paid a generous dividend but have not been above 20p since the late 1990s.

With debt remaining an issue and further provisions on the horizon, a sale looks the best option for preserving the business.

Presumably Balfour's management will have strong ideas about how to improve the margin at Birse, helped by their experience with Mansell - which will become home for Birse's building business - and its utilities acquisitions, John Kennedy and Kentons. If it can do so promptly and avoid the mishaps that blighted Carillion's purchase of Mowlem, the £32 million purchase price for Birse will look good value.

Balfour is believes the deal will be earnings-enhancing in the first full year.

Some analysts will argue that Balfour needs to source more of its prof its from overseas and would have preferred to see it expanding in the USA. But UK contracting businesses of this size rarely become available and Balfour is perhaps one of the few home-grown contractors with the financial muscle to enable Birse to realise its potential.