Carillion / Balfour Beatty: hard hats
Mooted deal between UK builders does not look attractive
Cost savings are the best, and usually the only, reason for companies to combine. But it does not follow that every deal offering savings is a good one. The increasingly bitter dalliance of Carillion and Balfour Beatty (billed as a merger, btu it would be an acquisition of the latter by the former) shows why. The two builders have been talking on and off for months, but have started to trade barbs about the likelihood of a deal. Carillion is keen; Balfour Beatty less so. Balfour should win the argument.
First, the cost savings. Carillion promises £175m, which is 16 per cent of the combined operating cost base. It puts the taxed and capitalised value of the savings at £1.5bn, and although that looks a little generous, it does suggest that lots of value could be added to the combined £3.1bn market cap. Carillion has made acquisitions before – Mowlem in 2006 and Alfred McAlpine in 2008 – so knows about integration.
But they were smaller deals, which points to the first problem with the pursuit of Balfour Beatty: scale. With £8.7bn of revenue Balfour is over twice the size of Carillion. This would be a huge deal to digest. The second problem is the state of the target. Balfour Beatty has had an awful year dominated by profit warnings and poor results. How much does Carillion’s management really know about what is inside Balfour Beatty or about how easy it will be to deliver the savings?
There is no need for Carillion to get involved with Balfour. It has done nicely enough since the crisis by taking risk out of its construction business. Its share price is up 93 per cent since the depths of the crisis; Balfour’s is up 7 per cent. Warren Buffett has opined on what happens when good management teams meet poor companies (the latter prove decisive). This is an unnecessary, risky pursuit of scale for its own sake. Carillion should abandon it.