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It has been reported that construction support services company Carillion, is surprised at Balfour Beatty’s decision to call an end to talks regarding a potential £3bn merger.

On 31st July, Balfour Beatty released a statement to the stock exchange stating that the decision was made following Carillion’s “wholly unexpected” decision to include Parson Brinckerhoff as part of the deal.

Carillion responded by saying that its board was surprised by Balfour Beatty’s reaction, but “continues to believe in the powerful strategic rationale of a combination and the capability of such a combination to create very significant shareholder value.”

Expert view

Carillion made its approach after Balfour Beatty had issued a number of profits warnings and lost its CEO, so Balfour Beatty appeared vulnerable and Carillion is opportunistic at the best of times. The original statement announcing the merger talks made clear that Balfour Beatty’s proposed sale of Parsons Brinckerhoff would go ahead separately from the merger talks, an indication that Balfour Beatty needs a significant cash injection sooner than a completed merger would provide.

This suggests that BB’s cashflow concerns are very serious. In addition, if Carillion cannot make the figures work for a merger without Parsons Brinckerhoff being included in the merger, then that suggests that the value of Balfour Beatty’s business to Carillion is lower than expected.

This is not really surprising because Balfour Beatty’s UK construction business is still under pressure (despite the renewed confidence in infrastructure and major projects here) because of a legacy of loss-making contracts that Balfour Beatty won during the downturn on wafer thin margins, together with tougher rules for contractors to pay their suppliers on time (brought about by recent changes to late payments legislation).

The right decision for UK construction?

Carillion had reduced its UK construction business during the downturn, but would it make sense to build that business back up by taking on pressures such as those faced by Balfour Beatty?

It could be that, despite a number of synergies between the two, the implications of a merger for UK construction could have been severe, with a significant number of redundancies and office closures where the two had considerable overlaps to rationalise. Times look very tough for Balfour Beatty and it may still be a target for a hostile takeover, or a candidate for wholesale restructuring, but by withdrawing from these talks, the board of Balfour Beatty may have done UK construction a favour.

Ask for merger advice

As the UK economy improves, some businesses will struggle with over-trading or cash-flow pressures, making them targets for merger or acquisition. If you can think of such a  target (or if you want to discuss the issues around struggling businesses and the challenges and opportunities they offer) then speak to the corporate team at Bray & Bray first.

There is always someone on and to offer you expert legal and industry focused commercial advice. Contact the Bray & Bray corporate law team by calling:

Leicester on 0116 254 8871.

Hinckley on 01455 639 900.

Market Harborough on 01858 467 181.