* Says there is no strategic logic to combination
* Deal would boost Carillion's international business
* Carillion considering its next move
* Companies have combined market value of 3 bln pounds
* Balfour half-year underlying pretax drops 53 pct
(Adds investor comments, updates shares)
By Li-mei Hoang
LONDON, Aug 11 British infrastructure company
Balfour Beatty has rejected a second merger proposal
from rival Carillion, saying it would pose significant
risks to its business.
Lossmaking Balfour Beatty said on Monday there was no
strategic logic to a combination other than to enhance the
combined group's earnings, and the risks were significant.
Balfour has construction, engineering and facilities
management services in over 80 countries. A tie-up would expand
Carillion's international business and add breadth to its
Carillion's approach, made public on July 24, followed a
difficult 18 months for Balfour, which has issued a series of
profit warnings and lost its chief executive in May.
Balfour broke off the talks a week after they emerged
because Carillion insisted that Balfour cancel the planned sale
of its U.S. unit Parsons Brinckerhoff and keep it in the merged
company. [ID: nL6N0Q621R]
Carillion's revised proposal included a final dividend
payment for Balfour shareholders and the covering of
"appropriate costs" for Parsons Brinckerhoff bidders. Carillion
also wants a deadline extension until Aug. 28 to make a formal
"In our board's judgment, it wasn't a credible proposal that
was going to fix all the risks for Balfour Beatty shareholders,"
Balfour Executive Chairman Steve Marshall told reporters.
"For example, if bidders (for Parsons Brinckerhoff) were not
prepared to carry on and if the merger then didn't go through,
Balfour Beatty is basically left with a failed merger
transaction and damage to Parsons Brinckerhoff," he said.
Carillion said it would consider its position and make a
statement in due course.
The companies have not disclosed financial terms of
Carillion's proposal. They have a combined market capitalisation
of 3 billion pounds ($5 billion).
Whitman Howard analyst Stephen Rawlinson called Balfour's
decision to go it alone a "brave move", and that Carillion's
management could have brought "great benefit" to Balfour.
He has a "sell" rating on Balfour shares and a "buy" on
Balfour shares were up 2.8 percent at 244 pence by 1124 GMT.
BALFOUR UNDERLYING PROFIT DROPS
Balfour announced the plan to sell Parsons Brinckerhoff in
May. It acquired the business in 2009 for 636 million pounds but
has said it failed to deliver significant benefits.
Besides its construction operations, Carillion maintains
British railways, roads and military bases, partly under
public-private partnership contracts. It has won a string of
contracts in the past 18 months worth 10 billion pounds.
Carillion's shares have fallen 2.9 percent so far this year
while Balfour's are down 18 percent - including a 6 percent fall
since it revealed the merger talks.
Niall Dineen, portfolio manager at AGF International
Advisors and a shareholder in both companies, said the cost
savings would be significant for both firms and that Carillion's
management may be better placed to manage the combined group.
"The whole idea of putting Balfour and Carillion together
makes sense because there should be synergies that could come
out of the deal. I know people had been talking about 200-300
million of synergies, which is quite a big number in the context
of the two companies," he said.
Reporting results two days early on Monday, Balfour Beatty
said it made a net loss in the six months to June 27, while
underlying pretax profit fell 53 percent to 22 million pounds.
It was hit by a slump in its mechanical and electrical
engineering division, which it already flagged in July, and said
it was performing in line with its most recent trading update.
Marshall said the company's search for a new CEO was ongoing
and it still aimed to return 200 million pounds to shareholders.
Balfour's shares are trading at a premium to Carillion's on
a share price-to-earnings basis, partly on expectations of an
eventual return to profit and the earnings potential of its
private finance initiative deals with the state.
"If Balfour is prepared to walk away from the merger, where
there are potential cost savings, they do really have to
demonstrate the value in the business," said Howard Seymour, an
analyst at Numis Securities.
($1 = 0.5960 British Pounds)
(Additional reporting by Nishant Kumar and Sarah Young,;
editing by Tom Pfeiffer)