August 14, 2014 / 10:26 AM / in 3 years

UPDATE 1-Undeterred Carillion pushes case for Balfour merger

* Carillion outlines merits of deal to Balfour shareholders

* Says tie-up would generate savings of 175 mln a year

* Balfour sceptical on synergies, rationale of deal (Adds Balfour statement, analyst reaction, shares)

By Paul Sandle and Karolin Schaps

LONDON, Aug 14 (Reuters) - British construction firm Carillion told Balfour’s shareholders a merger would deliver 175 million pounds in cost savings a year, hoping to get them on side after its UK target twice spurned its approaches.

Balfour Beatty has rejected two takeover proposals by Carillion to create a 3 billion pound ($5 billion) group better placed to compete for major international contracts against the likes of Spain’s Ferrovial. Carillion now has until Aug. 21 to make a final offer.

The two companies revealed in July they were in talks, but Balfour walked away only days later after Carillion insisted it cancel the planned sale of its U.S. engineering and design business Parsons Brinckerhoff.

Carillion remains undeterred. On Thursday it issued a summary of the arguments it had taken to Balfour’s big shareholders this week at the request of the Takeover Panel.

It said it could save more than 175 million pounds a year by the end of 2016, more than some analysts expected, by streamlining offices, supply chains and IT.

The synergies were worth more than 1.5 billion pounds in stock market value, before any re-rating, it said.

It also said it would give Balfour’s shareholders an additional cash dividend of 8.5 pence a share.

Balfour said it had “serious reservations” about whether the synergies could be achieved.

It said shareholders would benefit more from its own plan to develop its British construction business rather than Carillion’s ambition to scale it back, and it was too risky to end the process of selling Parsons Brinckerhoff.

“The Board is confident that pursuing its strong independent strategy based around a recovering UK business, growing U.S. market and significant investments business is more attractive than a merger on the terms proposed,” it said.

Shares in Balfour Beatty, which have come off highs of 322 pence when talks were disclosed, were up 1.5 percent at 240 pence by 0932 GMT. Carillion’s stock was up 6.3 percent at 340 pence, the highest level since Balfour walked away on July 31.

Analysts at Liberum said Carillion had been spurned but not deterred.

“The synergy prize is too big to walk away from, with Carillion confident of achieving at least 175 million pounds,” they said. “We believe final synergies could be higher - perhaps 250 million pounds. Egos aside, this deal should happen.”

Carillion said it would overhaul Balfour’s British construction business along the same lines as it rescaled its own activities by taking a more selective approach to bidding on contracts and growing its services.

The company said on Thursday that restructuring helped it post a 3 percent rise in first-half underlying pretax profit of 75.9 million pounds on slightly lower revenue of 1.87 billion pounds. It said it was still targeting revenue growth for the full year, for which its expectations were unchanged. ($1 = 0.5995 British Pounds) (Editing by Sophie Walker)

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