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The Carillion share price (LSE:CLLN) rose 8.0% today, a change of 25.60 pence to 345.60 as investors seem to be responding to the company’s published rationale of why the proposed merger with Balfour Beatty (LSE:BBY) makes good sense. However, the Balfour Beatty share price also gained 4.40 pence, or 1.86%, to 240.90 as the company is now viewing the proposal with more than mild public skepticism.
On 25 July, following the initial announcement of Carillion’s offer and Balfour’s interest, both stocks surged rather significantly to heights that neither company has been able to maintain over the interim. On that date, Carillion closed at 362.80 with Balfour closing at 253.10. Both have declined since and neither has returned to the marks set on that day. But the boards of both companies were starry-eyed and in love back then. They appeared to agree that, “The merger…has the potential to create a market-leading services, investments and construction business of considerable depth and scale.” I also agreed. As far as that statement goes intrinsically, I still agree, but there are now new aspects to the proposal that have caused it to lack some of the luster, at least in Balfour’s eyes.
Balfour’s board said on Monday that it, “Has lost confidence in the likely delivery of a successful transaction and has therefore concluded that the current proposal from Carillion is not in the best interests of Balfour Beatty shareholders.”
Carillion’s Case
This morning Carillion published it’s selling points concerning the synergies, purportedly causing the share price reaction today. The obvious purpose was to engage the interest of BBY shareholders. Really, it was pretty standard stuff for deals of this kind, primarily with consolidation and elimination of redundancy, which, ironically have nothing to do with synergy. However, the attractive statement was the Carillion estimate that the eventual savings obtained through a merger would be the equivalent of £1.65 billion in market value.
Balfour’s Apprehension
It’s not a matter of Balfour not agreeing with the potential value a merger could create. The company’s concern is that amount of risk that it exposes its shareholders to by even entertaining the proposal as it currently stands. Their statement outlined those risks.
- The risk of undermining the Parsons Brinckerhoff sales process, which is a key strategic objective of the Group, particularly as there is no strategic logic for its retention other than to enhance the earnings of the combined group
- Bidders for Parsons Brinckerhoff may not regard the cost cover as adequate to remain fully committed to the process with the resultant risk that the sale process would be terminated
- Risk that a failed sale process would materially impact the motivation and retention of Parsons Brinckerhoff management and employees and damage its competitive position in a rapidly consolidating professional services market
- Impact of terminating the Parsons Brinckerhoff sale process would be compounded if the merger with Carillion did not complete, in which case any associated loss of value would be entirely for the account of Balfour Beatty’s shareholders
- Significant execution risk associated with the integration of the two businesses would be substantially increased by any material revenue reduction in Balfour Beatty’s Construction Services UK business
- Any material reduction in Balfour Beatty’s revenues in Construction Services UK would create unacceptable operational and financial risks:
- Increase restructuring costs and cash and working capital outflows
- Reduce the addressable cost base and bankable synergies
- Remove profitable business opportunities, taking away future earnings recovery potential
- The risk of engaging in detailed due diligence with a competitor while having serious reservations about the transaction and its deliverability
- The risk of not meeting the envisaged announcement date under the revised proposal of 28 August given Balfour Beatty’s due diligence requirements and the impact on the Parsons Brinckerhoff process should an alternative, later announcement date be required. (All emphasis is mine.)
Balfour CEO, Nick Pollard, told reporters that, “From my personal perspective we need to keep the foot on the gas with all the measures implemented, really make them bite, deliver profits and at the same time identify and accelerate our work on procurement by engaging more collaboratively with our suppliers to identify and eradicate wasted effort – all to the mutual benefit of the bottom line.”
