After seemingly spending the whole summer issuing profit warnings and rejecting merger talks with sweet-talking rival Carillion, struggling construction giant Balfour Beatty may have hoped it could get on with building stuff in peace. Today, that hope was dashed, as FTSE 250 listed John Laing Infrastructure Fund (JLIF to its friends) announced it's making a £1bn offer for a major part of the business.
Unlike Carillion, which wanted the whole company, JLIF is only interested in one thing – Balfour Beatty’s investment portfolio, particularly its Private Finance Initiative (PFI) contracts. JLIF already has 54 such contracts already, including hospitals and roads, and now it wants the 60 or so in Balfour Beatty’s stable.
The £1bn bid seems a bit low, given that in August Balfour Beatty - which employs 40,000 people in 80 countries - valued its own investment arm at £1.1bn and that Carillion’s final offer for the whole firm was £2.09bn. Balfour Beatty’s board is likely to resist, especially because it would break the company up, leaving them with the rump. That rump being the private construction business, which grew rapidly during the downturn by bidding low on building contracts, only for the costs of labour and materials to spiral.
There are reasons, however, that shareholders might be tempted to agree to the deal. For a start, JLIF is offering cold, hard cash, which it says it will find through a rights issue of its own, while Carillion’s bid was all shares. Besides, Carillion’s offer was for Balfour Beatty’s private construction business and US design consultancy Parsons Brinckerhoff, which was sold for £750m a month ago, above and beyond its safe-as-houses investment arm.
Given the spate of profit warnings (there have been three since May, the last of which revealed a £75m shortfall) and rapidly disappearing senior management team (two bosses gone in two years, and a chairman to boot), £1bn in cash might not seem like a bad deal after all.
Indeed, Balfour Beatty stock rose 5% to 192.5p this morning on the news, in a sign the market thinks those shares are suddenly worth having. On the other hand, of course, it may be in anticipation of Carillion’s next move.
There’s nothing like a little jealousy to rekindle the ardour of a spurned suitor. It’s quite possible Carillion will be back to talk mergers in February, once Takeover Panel rules allow, or even sooner, should Balfour Beatty’s board go crawling back to them in the hope of keeping the 109 year old company intact.