The ongoing attempts by Carillion (LSE: CLLN) to negotiate a merger with Balfour Beatty (LSE: BBY) appear to be reaching an awkward stage.
For the second time, Balfour has issued a statement without Carillion’s consent, explaining why it has rejected another of the latter firm’s merger proposals.
In my view, a deal looks increasingly unlikely, as the two companies appear to have a fundamental problem: Balfour Beatty is determined to sell its US services business, Parsons Brinckerhoff, but Carillion only wants to buy Balfour with the Parsons included.
Carillion now has until 21 August to announce a firm offer or withdraw, but in the meantime investors need to consider which — if either — of these firms looks the most attractive as standalone businesses, and whether they would want to own shares in a combined Balfour-Carillion company.
Latest numbers
Today’s announcement came alongside Balfour Beatty’s first-half results, which were as bad as expected, but no worse:
| Financials | H1 2014 | Change from H1 2013 |
| Revenue | £4,851m | -2% |
| Underlying operating profit | £37m | -31% |
| Underlying earnings per share | 3.9p | -41% |
| Interim dividend | 5.6p | Unchanged |
Source: Company report
Analysts’ consensus forecasts for full-year earnings are currently 16p — considerably more than double the 3.9p in adjusted earnings per share that Balfour has managed during the first half of the year.
Carillion, meanwhile, appears healthy enough, although lacking in both scale and growth potential. This is reflected in an undemanding 2014 forecast P/E of 9.7 and generous prospective dividend yield of 5.6%, neither of which are expected to rise very strongly next year.
What’s wrong?
My concern is that both companies are currently enjoying a bumper run of profits from the disposal of their portfolios of public-private partnership (PPP) infrastructure assets. These are likely to tail off in the next year or so, and won’t be readily repeatable — which could leave both firms with reduced earnings power.
Although Carillion’s balance sheet is pretty healthy, with net gearing of just 22%, Balfour’s is less so — the firm’s net gearing is 50%, and rising. According to today’s announcement from Balfour, one of Carillion’s conditions was the cash resulting from the sale of Parsons Brinckerhoff would be retained in the business — suggesting to me that the board of Carillion share my concerns over Balfour’s debt levels.
Which would you buy?
It’s easy to see why both companies thought a merger might work: improved scale in the UK, US and Middle East should help improve long-term earning power. However, I’m not sure it will happen — and in the meantime, my pick of the two firms would be Carillion, which unlike Balfour, boasts a generous and well-covered dividend.