Shedding its chief executive in May and reporting big profit shortfalls in Britain, Balfour Beatty plc, London, now is considering a merger proposal from Carillion PLC, a smaller, U.K.-based competitor.
The joint company would have global sales exceeding $20 billion, with substantial construction and support-services businesses in the U.S. and Canada.
The two companies confirmed market rumors of merger talks after the close of the London Stock Exchange on July 24. According to U.K. merger rules, they must decide whether to go ahead by Aug. 21.
A possible combination would not affect Balfour Beatty's previously announced plan to sell Parsons Brinckerhoff, the U.S.-based professional-services giant it acquired in 2009.
In a statement, Balfour Beatty and Carillion said the transaction "has the potential to create a market-leading services, investments and construction business of considerable depth and scale. Work is now underway to develop a strategy and outline a business plan for a combined entity.”
Upon the market’s opening on July 25, Balfour Beatty's share value increased by nearly 12 percent and Carillion’s increased by more than 9 percent. But Balfour's shares were still well below the value prior to the company’s profit warning on May 6 and the simultaneous departure of CEO Andrew McNaughton. Executive Chairman Steve Marshall is filling that role while the firm seeks a new CEO.
Balfour Beatty ranks at No. 24 on ENR's list of the Top 250 Global Contractors, reporting about $13.3 billion in 2012 revenue in the U.K. and abroad. About $6 billion is outside Britain.
Balfour Beatty is more than double the size of Carillion. The larger firm operates in East Asia, Australia, Canada and the Middle East.
Whatever the outcome of the merger talks, Balfour Beatty intends to sell its New York City-based Parsons Brinckerhoff Inc. That firm has grown since the acquisition, but “having professional-services and construction capabilities combined within one organization has not delivered material competitive advantage,” the contractor said in May.
“People view Balfour Beatty as a very good civil and infrastructure construction business … [but] clients are a bit suspicious of having the whole integrated offering,” says Andy Brown, construction-sector analyst at N+1 Singer Capital Markets, London.
The U.S. has become Balfour Beatty’s key foreign market, accounting for more than 40 percent of sales, close behind its U.K. total of 48 percent.
U.S. growth has been boosted by a string of acquisitions of mainly small to medium-size contractors in the past five years.
However, the purchase of Parsons Brinckerhoff for $626 million in late 2009 was its largest.
Carillion operates in basically the same sectors as Balfour Beatty but has a far larger emphasis on support services. Nearly three-quarters of its business is in the U.K., though Canada accounts for under 20 percent, with the Middle East providing the balance. Both companies are active in the North American PPP market.