* Carillion and Balfour shares jump
* Biggest gainers on FTSE 250 index
* Potential merger worth 3 billion pounds
By Li-mei Hoang
LONDON, July 25 British construction company
Carillion is in talks with Balfour Beatty on a
possible merger that would create a 3 billion pound ($5.1
billion) group with the muscle to compete with rivals such as
Spain's Ferrovial and France's Vinci.
The approach from Carillion follows a difficult 18 months
for Balfour Beatty, which has had a series of profit warnings
and lost its CEO Andrew McNaughton in May.
Carillion, with a market capitalisation of some 1.5 billion
pounds before the talks were revealed, currently operates in
Britain and Ireland, Middle East and North Africa and Canada.
A deal with Balfour, which operates in more than 80
countries providing construction, engineering and facilities
management services, would significantly expand its
Carillion, which maintains British railways, roads and
military bases, said in March that it planned to diversify its
support services business into sectors such as oil, power
distribution and highways maintenance.
Its projects include the redevelopment of London's Battersea
Power Station. It has won a string of contracts in the past 18
months worth 10 billion pounds.
This week Carillion won three contracts worth up to 2.8
billion pounds in a joint venture with infrastructure firm Amey
to deliver support services to Britain's Ministry of Defence.
Its shares are up 10 percent year to date, not including a
rise on Friday of more than 7 percent.
Balfour, which had a slightly larger market value of about
1.6 billion pounds, said in July it would take another 35
million pound hit to its profit after trading in its mechanical
and electrical engineering division deteriorated.
Balfour is expected to report a 20 percent fall in annual
pretax profits to 150.30 million pounds, according to an average
estimate of 13 analysts polled by Thomson Reuters.
Its shares have fallen by 20 percent since the start of the
year. They rose more than 9 percent on Friday.
"Balfour Beatty's recent operational performance has been
extremely poor. It does not have a chief executive. Its
shareholders are frustrated," Liberum analysts said.
"It is far too early to assess terms or levels, but we
expect an acquisition of Balfour Beatty would be 20 percent
accretive to Carillion," they said.
The companies' combined revenues could be more than 14
billion pounds, with an order book of more than 31 billion
pounds, and annual savings of around 200 million pounds, Whitman
Howard analyst Stephen Rawlinson said.
"If some trading issues improve and the savings can be
achieved, the combined entity would be a candidate for FTSE 100
entry as market capitalisation should get to 4 billion pounds,"
Balfour has the higher price to earnings ratio of the two
firms, at 12.6 times for Balfour compared with 9.8 for
Carillion, according to Thomson Reuters data.
The companies have until Aug. 21 to announce a firm
intention to merge or state that a deal will not take place.
(Editing by Kate Holton, Ruth Pitchford and Jane Merriman)