City speculates on Chinese buyer for Balfour Beatty

Rumours have been circulating in the City of London that an Asian company, possibly Chinese, may be interested in buying Balfour Beatty, the UK’s biggest contractor, since talks over a merger with Carillion broke down.

"The Chinese players have been pretty clear about their desire to invest in and take a stake in UK infrastructure, so buying Balfour would give you a very direct route to that," analyst Andrew Gibb of Investec said in an interview with GCR.

Chinese companies are keen to break into the European and US markets, and Balfour Beatty’s presence in Europe, the US and the Middle East will be attractive, analysts say.

"They may think that this is an opportunity that’s never going to arise again," Kevin Cammack, of Cenkos Securities, told GCR. "The problem will be getting any sort of approval from the authorities in the US because I don’t suppose the US federal or military clients that Balfour works for will want them being owned by the Chinese."

Cammack added: "It’s a real opportunity. Balfour is very affordable and it would be attractive for a firm that wasn’t relying on carving the business up to make savings, that was looking at it from a revenue-plus basis." 

Investec’s Andrew Gibb said a hostile takeover is another possibility.

"Someone like Bouygues who are very clear on that they want to expand into the UK and US, and have the cash from their sale of their stake in Alstom may have the financial capacity to mount a merger," he said. "One thing is that a company with cash resources might well mount a hostile bid."

In a press conference on Monday Balfour Beatty explained why it had walked away from its merger with Carillion. 

Steve Marshall, the company’s executive chairman, pointed out that the approach had come at an awkward time, as Balfour was in the middle of auctioning off Parsons Brinckerhoff, its professional services arm, and he himself was only a caretaker chief executive. 

Although Marshall is prevented by Takeover Panel rules from discussing what the business plan was for the merged company, he indicated that Balfour’s management was less than enthusiastic about it from the outset, and Carillion’s change of heart on the sale of Parsons was an automatic dealbreaker.

He said: "To achieve bankable synergies while downsizing a very large business is challenging. As you run out the project base and reduce revenues, the underlying level of costs is very significant. And that’s before you get to bankable synergies. In addition, there’d be increased restructuring costs."

He added that the decision had been taken before the due diligence process had got under way, as "you do not lightly expose your entire business to a competitor, and then potentially to any other legitimate bidder who might present themselves, if you have serious reservations about the transaction and its deliverability".

Carillion said it would not respond to Marshall’s statement directly, although it may issue a comment to the London Stock Exchange’s regulatory news service. 

There was a consensus among City analysts that Carillion would be unlikely to launch a hostile takeover of Balfour, although there was speculation that Balfour was now "in play". 

Andrew Gibb of Investec told GCR: "That’s not going to happen. Carillion don’t have the balance sheet to go hostile." 

Stephen Williams, the investment manager of Brewin Dolphin, said: "The tone of Carillion’s statements seems to be one of anger that the talks have been terminated, but Balfour is now open to an external bid and there is substantial value to be unlocked. We are not convinced that remaining independent is a viable option."

Cenkos Securities’ Kevin Cammack told GCR: "Balfour is larger and more international than than virtually any other UK core contractor you can think of – even Carillion struggled to do anything that didn’t involve them putting in new equity – so there can’t be many companies that have the resources or desire to take it on. If you think who’d be attracted to a business spread between the UK, US, Hong Kong and Middle East, it has almost got to be someone who wants to play on that international stage, or is already."