Balfour Beatty is expected to receive a £1bn offer for its investment arm this week in a development that could lead to an eventual break-up of the construction company.
John Laing Infrastructure Fund, a FTSE 250 investor in roads, schools and hospitals, has been studying Balfour’s investment portfolio, which includes about 60 private finance initiative contracts and accounts for almost two-thirds of the value of the building company. It is expected to make an offer within days.
Balfour is likely to resist any approach for its PFI assets, which are closely integrated with the company’s construction work and would leave the rest of the business with a much reduced valuation. One person close to Balfour said that JLIF “would have to bid for all or nothing”.
Balfour, the builder of the Olympics stadium in London, recently appointed Leo Quinn, the current boss of defence research group Qinetiq, as chief executive in an effort to revive the company’s fortunes following five profit warnings and the loss of two chief executives in less than two years. But Mr Quinn is not due to start until January.
Balfour is a global construction company employing 40,000 employees across 80 countries. But the 109-year-old business became a takeover target after it warned that it had developed problems with its UK building contracts, which it won at cheap prices during the recession but where labour and material costs have spiralled.
Shares in the £8.5bn turnover company have fallen by more than a third in the year to date, leaving Balfour with a market capitalisation of £1.26bn as of Friday’s close. JLIF has a market capitalisation of £1bn.
During the summer Balfour fended off an all-share takeover bid from Carillion, a smaller rival, and then sold its US services business Parsons Brinckerhoff for about £750m. Even if JLIF does not succeed with a bid for Balfour’s investment arm, the move is likely to fuel speculation that Carillion will return with a fresh approach when Takeover Panel rules allow next February.
In September, Balfour discovered a £75m shortfall that will wipe out most of its earnings this year. KPMG, the accountancy, has been hired to investigate its remaining contracts and is due to report before Christmas.
Balfour’s PFI contracts delivered pre-tax profit of £132m last year and cover hospitals, schools and military bases as well as 20 military housing projects in the US.
Funds that invest in PFI schemes have been growing in popularity with investors as a way of securing a steady and reliable income stream.
JLIF is one of is one of Europe’s biggest infrastructure funds and joined the stock market in 2010 when it acquired a book of PFI contracts from John Laing, the developer owned by Henderson Equity Partners.
It has stakes in 54 low-risk, operational PPP infrastructure projects located in the UK, Europe and North America. Assets include hospitals such as North Staffordshire, Kingston and Queen Elizabeth in Greenwich.
John Laing and Balfour Beatty declined to comment.