LONDON British infrastructure company Balfour Beatty said on Thursday it had terminated talks with Carillion (CLLN.L) over a possible 3 billion pound ($5 billion) merger, only days after the possible deal was revealed.
Balfour said it backed away after Carillion insisted that Balfour cancel a planned sale of its U.S. engineering and design business Parsons Brinckerhoff and keep it within the merged company.
The approach by Carillion followed a difficult 18 months for Balfour Beatty, which has made a series of profit warnings and lost its chief executive in May.
Balfour announced it would sell Parsons Brinckerhoff in May. It acquired the business in 2009 for 636 million pounds ($1.1 billion) but Balfour said it failed to deliver significant benefits.
Carillion and Balfour had said in a joint statement last week that the Parsons Brinckerhoff sale would be unaffected by their tie-up talks. Engineering firm WS Atkins (ATKW.L) was understood to be one of the interested parties in the business.
Whitman Howard analyst Stephen Rawlinson who has a "sell" rating on Balfour, said the company was right in its decision not to rush the sale of Parsons Brinckerhoff, adding that the process would be complicated.
"We can see that Balfour might be annoyed that Carillion may now think that the merged entity might wish to keep Parsons, having previously indicated the sale could go ahead," he said.
"But equally, a hasty sale of Parsons from a position of weakness which Balfour is now in does not help either company."
Balfour, which has a stock market capitalization of about 1.75 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.
It is expected to report a 17 percent fall in pretax profits for the full year, according to a Thomson Reuters poll of 11 analysts.
The company said it would proceed with its own business plan and was still searching for a new chief executive.
Carillion, with a market capitalization of some 1.5 billion pounds, operates in Britain and Ireland, Middle East and North Africa and Canada.
A deal with Balfour, which provides construction, engineering and facilities management services in more than 80 countries, would have helped significantly expand its international business and add heft to its construction division.
Balfour's shares have fallen 12 percent since the start of the year and were down 5.3 percent by 0736 GMT (3.36 a.m. EDT), making it the second-biggest decliner on the FTSE 250 .FTMC index. Carillion shares were down 4.4 percent.
"This leaves Balfour Beatty still without a CEO and in a weak position and the stock should be avoided. From Carillion's perspective, the discussions were always going to be low-risk and the change of heart on the sale of Parson was correct in our view," said Rawlinson.
(Reporting by Li-mei Hoang; Editing by Kate Holton and David Holmes)