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Balfour Beatty PLC (BBY)

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Friday 15 August, 2014

Balfour Beatty PLC

Rejection of Carillion's Proposal

RNS Number : 2383P
Balfour Beatty PLC
15 August 2014
 



NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN OR INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF SUCH JURISDICTION

 

THIS ANNOUNCEMENT IS NOT AN ANNOUNCEMENT OF A FIRM INTENTION TO UNDERTAKE ANY TRANSACTION UNDER RULE 2.7 OF THE CITY CODE ON TAKEOVERS AND MERGERS (THE "CODE") AND THERE CAN BE NO CERTAINTY THAT ANY TRANSACTION WILL PROCEED NOR AS TO THE TERMS OF ANY TRANSACTION

 

FOR IMMEDIATE RELEASE

 

15 August 2014

 

Balfour Beatty plc

Rejection of Carillion's Proposal

The Board of Balfour Beatty has further considered the announcement from Carillion plc ('Carillion') dated 14 August 2014. The proposal remains unchanged to that rejected on 11 August 2014. The Board reaffirms its rejection of the proposal. A more detailed analysis is set out below.

In reaching its decision on the merger proposal, the Board has considered:

·     the potential for synergies;

·     cost and execution risks;

·     a reduced exposure to recovery in UK construction;

·     risk of revenue and cost leakage; and

·     the impact of terminating the Parsons Brinckerhoff sales process.

 

The Board has also considered the opportunities represented by pursuing its independent strategy, the benefits of which will accrue 100% to its shareholders. These include:

·     a recovering UK construction business;

·     the opportunity to deliver further efficiencies;

·     a strong US construction business in a growing market;

·     a leading Investments business;

·     material exposure to recovery in the UK; and

·     the anticipated successful sale of Parsons Brinckerhoff

 

In evaluating the proposed combination the Board also considered the right strategic approach to maximise value for shareholders. The Board believes this is the right time to sell Parsons Brinckerhoff, but believes Carillion's approach for the entire Group at this stage of the construction cycle is opportunistic.

Carillion's merger proposal

In evaluating the merger proposal, consideration was given to the following:

·   Potential for synergies: 

The Board believes the proposed plan involves reducing Balfour Beatty's UK construction revenues by up to two thirds.

Such rescaling would require a significant reduction in overheads, just to maintain current margins (equivalent to over 6% of the lost revenue).

This cost reduction will reduce the amount of available synergies that flow through to profitability. Cost savings driven by shrinking the business should not be confused with synergies.

These reductions in cost will reduce the amount of the £175 million that could enhance profitability.

A smaller UK construction business would have a lower addressable cost base, further reducing the potential synergies available from any transaction.

Incremental value for shareholders can only be generated by increasing absolute profit and cash returns.

Taking into account the revenue reduction detailed above, the capitalised value of the synergies would be materially lower than the over £1.5 billion suggested by Carillion.

In addition any capitalised value needs to take into account the associated costs of approximately £225 million, the value leakage from transaction and financing fees, and the net present value of working capital outflows.

 

·   Cost and execution risks: 

The combined group would be of a significantly larger scale and diversity than the Carillion management team has previously managed, with annual revenues of c.£14 billion and c.80,000 employees, excluding joint ventures. The proposed retention of Parsons Brinckerhoff exacerbates the scale of the challenge at a time when the management team would be undertaking a fundamental downsizing of the UK construction businesses.

The implementation programme would be complex, requiring simultaneous business restructuring, integration and outsourcing, at the same time as a significant IT change programme which is already under way. This questions the applicability of historical benchmarks.

 

·   A reduced exposure to recovery in UK construction:

The revenue of Balfour Beatty's UK construction businesses in 2013 was £2.8 billion.

This includes a Regional construction business in the UK of approximately £1.8 billion.

We believe Carillion's proposal represents a two thirds reduction in overall revenue levels, the majority of which would be in Regional construction.

This business is best placed to benefit from any recovery in UK construction, and is already showing signs of such a recovery.

 

·   Risk of revenue and cost leakage: 

There is overlap between both groups in strategic sectors and clients within the UK and the wider Group. This could result in revenue and profit leakage.

Not all procurement savings would be retained, because of contract structures (eg open book) and the competitive nature of bid processes.

 

·   Terminating the Parsons Brinckerhoff sales process:

The Board decided to pursue a sale of Parsons Brinckerhoff as it did not deliver material competitive advantage for the Group and added significant complexity.

The sale process is well advanced and is evidencing the strategic value of the asset in a rapidly consolidating global professional services sector.

Terminating this process risks damaging a significant part of the value of Balfour Beatty.

 

Balfour Beatty's organic opportunity

As set out in Monday's interim results announcement, Balfour Beatty has a clear standalone plan for delivering value, 100% of which will accrue to its shareholders. This includes:

·     An optimal approach to restoring value from the UK construction business including progressively returning it back to peer group margins.

·     Refocusing the Group in order to reduce complexity and improve the risk profile.

·     Realising indirect overhead savings and shared service efficiencies across the Group.

·     Concluding the Parsons Brinckerhoff sales process at a value attractive to shareholders.

·     Assessing other value creation opportunities on an ongoing basis.

·     Balfour Beatty will be refocused as an Anglo-American construction and specialist services group where there is strong US market opportunity and UK margin recovery potential. The Group's over-arching investments business is value creating and synergistic. Joint ventures in the Far East and the Middle East will be retained subject to them being value accretive.

 

Recovering UK construction business

·     Continue the turnaround of UK Construction which is already underway, as evidenced in our HY 2014 results that demonstrated performance improvement compared to HY 2013 in the regional and major projects businesses (c. 90% of Construction Services UK by revenue).

·     Retain our Regional construction business and progressively return to peer group margins through more selective tendering. This entails realigning our bidding to the customers, geographies and sectors with the best pipeline of profitable work. We are focusing on repeat customers, frameworks and larger contracts over £5 million. These actions will result in a large reduction in the number of contracts but only a modest reduction in revenue.

·     Further enhancing our work winning effectiveness in Major Projects through the development of closer customer relationships.

·     Leveraging the powerful combination of local knowledge and contacts from our Regional business with our national Major Projects capability to create a differentiated offer from competitors with only a Regional or Major Projects capability.

·     Stabilising Engineering Services; slimming down to specific markets with higher margins and increasing the proportion of internal work, in support of our building operations.  

·     We will continue to demonstrate this plan is working by sharing leading indicators on a periodic basis, including on the size, composition and margin of our order book and in respect of overhead efficiencies.

·     Our plan of progressive but substantial improvement avoids operational and value destruction risks, and leaves it much better equipped to exploit the market recovery that is under way.

 

Delivering further efficiencies

·     A reduction in overheads, based on actual not theoretical data, returning the business to its historical norms of below 5% of revenue (compared to current level of above 6%), through:

A reduction in management layers, and a slimmed down office network in the Regional business facilitated by the substantial reduction in the number of contracts.

Further consolidation of fixed premises to reduce property costs, assisted by increasing mobility of the operational and support function teams.

More efficient support functions from greater centralisation, standardising processes, and outsourcing, including more efficient IT infrastructure and processes (key components of which are the recently outsourced IT services contract and the implementation of a common IT platform).

Supply chain improvements - aggregating and centralising the core of our procurement, leveraging our scale as the UK's largest single contractor to secure direct and indirect cost reduction.

·     Balfour Beatty has already demonstrated that cost savings can be achieved independently of a merger; £70 million of annualised cost savings have been delivered over the last three years.

 

A strong US construction business in a growing market

·     Our US construction business is performing strongly, with 14% revenue growth in HY 2014 at constant currency.  Order intake grew, and the visibility of future opportunities in our target sectors continues to improve.

·     The Architectural Billings Index (ABI), a leading indicator for US non-residential activity, has been in positive territory for 8 out of the last 12 months, which indicates a broader market recovery is underway.

A leading Investments business

·     The Investments business continues to perform strongly as we continue to expand both geographically and in our existing markets.

·     Over the last 30 months we have generated £309 million of UK proceeds for an average increase over the Directors Valuation of 52%.

·     As a consequence of prices achieved on these and other recent disposals, we have undertaken a review of the Directors' Valuation of our UK portfolio with the intention of taking into account current market conditions. An update will be released as soon as possible.

Material exposure to recovery in the UK

·     Construction Products Association forecasts that the UK construction industry will grow 4.7% in 2014 and 4.8% in 2015, with a total construction output increase of 22.2% over the next five years. In addition, the Association forecasts that infrastructure output will rise 9.2% in 2014 and 7.0% in 2015.

·     In Major projects the total of our order book and awarded but not contracted ('ABNC') work at June 2014 was up 26% on the prior year.

·     In Regional construction we have seen a steady increase in our bid margins on new orders which are up by 2.8 percentage points since the start of 2013. 

The anticipated successful sale of Parsons Brinckerhoff

·     The sale process is materially advanced.

·     Competitive nature of the process demonstrates the attractiveness of the asset at this point in the cycle.

·     Sale proceeds will allow a return of up to £200 million of capital to Balfour Beatty shareholders, will reduce pension liabilities and will further strengthen Balfour Beatty's financial position.

 

Accordingly, in light of these considerations as well as those outlined in the announcements by Balfour Beatty on 11 and 14 August 2014, the Balfour Beatty Board has again concluded that the proposal from Carillion is not in the best interests of Balfour Beatty shareholders.

In addition, as already indicated, the Board remains open to strategic value creating opportunities across the Group while it concentrates on the restoration of value to its shareholders. It will consider all such opportunities, and the risks associated with their execution, taking full account of the significant recovery potential within the Balfour Beatty business.

There can be no certainty that an offer will be made by Carillion for Balfour Beatty nor as to the terms of any such offer.

This announcement is not being made with the consent of Carillion.

 

 

 

Enquiries:

Balfour Beatty

 

Anoop Kang, Head of Investor Relations
+44 (0) 20 7216 6913

anoop.kang@balfourbeatty.com

Patrick Kerr, Director of Corporate Communications
+44 (0) 20 7963 4258

patrick.kerr@balfourbeatty.com

 

Goldman Sachs (Lead Financial Adviser and Corporate Broker to Balfour Beatty)

 

Anthony Gutman

Philip Shelley

Owain Evans

+44 (0) 20 7774 1000

 

BofA Merrill Lynch (Joint Financial Advisor and Corporate Broker to Balfour Beatty)

Michael Findlay

Justin Anstee

Georgina Stober

+44 (0) 20 7628 1000

 

Maitland

Liz Morley

James Isola

+44 (0) 20 7379 5151

 

Directors' Responsibility Statement

The Directors of Balfour Beatty accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Directors, who have taken all reasonable care to ensure such is the case, the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information.

 

This announcement is for information purposes only and does not constitute an offer to sell or an invitation to purchase any securities or the solicitation of an offer to buy any securities, pursuant to the offer or otherwise.

 

Disclosure requirements of the Code

Under Rule 8.3(a) of the Code, any person who is interested in 1% or more of any class of relevant securities of an offeree company or of any securities exchange offeror (being any offeror other than an offeror in respect of which it has been announced that its offer is, or is likely to be, solely in cash) must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified. An Opening Position Disclosure must contain details of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s). An Opening Position Disclosure by a person to whom Rule 8.3(a) applies must be made by no later than 3.30 pm (London time) on the 10th business day following the commencement of the offer period and, if appropriate, by no later than 3.30 pm (London time) on the 10th business day following the announcement in which any securities exchange offeror is first identified. Relevant persons who deal in the relevant securities of the offeree company or of a securities exchange offeror prior to the deadline for making an Opening Position Disclosure must instead make a Dealing Disclosure.

 

Under Rule 8.3(b) of the Code, any person who is, or becomes, interested in 1% or more of any class of relevant securities of the offeree company or of any securities exchange offeror must make a Dealing Disclosure if the person deals in any relevant securities of the offeree company or of any securities exchange offeror. A Dealing Disclosure must contain details of the dealing concerned and of the person's interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror, save to the extent that these details have previously been disclosed under Rule 8. A Dealing Disclosure by a person to whom Rule 8.3(b) applies must be made by no later than 3.30 pm (London time) on the business day following the date of the relevant dealing.

 

If two or more persons act together pursuant to an agreement or understanding, whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a securities exchange offeror, they will be deemed to be a single person for the purpose of Rule 8.3.

Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosures must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4).

 

Details of the offeree and offeror companies in respect of whose relevant securities Opening Position Disclosures and Dealing Disclosures must be made can be found in the Disclosure Table on the Takeover Panel's website at www.thetakeoverpanel.org.uk, including details of the number of relevant securities in issue, when the offer period commenced and when any offeror was first identified. You should contact the Panel's Market Surveillance Unit on +44 (0)20 7638 0129 if you are in any doubt as to whether you are required to make an Opening Position Disclosure or a Dealing Disclosure.

 

Publication on website

A copy of this announcement will be made available subject to certain restrictions relating to persons resident in restricted jurisdictions on Balfour Beatty's website at www.balfourbeatty.com by no later than 12 noon (London time) on 18 August 2014.

 

The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement.

 

Further information

Goldman Sachs International, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom, is acting as financial adviser to Balfour Beatty and no one else in connection with the matters referred to in this announcement. In connection with such matters Goldman Sachs International, its affiliates and its and their respective directors, officers, employees and agents will not regard any other person as their client, nor will they be responsible to anyone other than Balfour Beatty for providing the protections afforded to clients of Goldman Sachs International, or for giving advice in connection with the contents of this announcement or any other matter referred to herein.

 

Merrill Lynch International ("BofA Merrill Lynch"), a subsidiary of Bank of America Corporation, is acting exclusively for Balfour Beatty in connection with the matters referred to in this announcement and for no one else and will not be responsible to anyone other than Balfour Beatty for providing the protections afforded to its clients or for providing advice in relation to the contents of this announcement or any other matter referred to herein.

 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN WHOLE OR IN PART IN, INTO OR FROM ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF THAT JURISDICTION. THIS ANNOUNCEMENT DOES NOT CONSTITUTE A TAKEOVER OFFER OR AN OFFER OF SECURITIES. NO OFFER OR SALE OF SECURITIES MAY OCCUR IN THE UNITED STATES UNLESS THE TRANSACTION HAS BEEN REGISTERED UNDER THE US SECURITIES ACT OF 1933 (THE "SECURITIES ACT") OR IS EXEMPT FROM REGISTRATION THEREUNDER. NO SECURITIES HAVE BEEN OR WILL BE REGISTERED UNDER THE SECURITIES ACT AND THERE WILL BE NO PUBLIC OFFER OF SECURITIES IN THE UNITED STATES.

 

 

 

 

 

 

APPENDIX I

SOURCES AND BASES

 

Unless otherwise stated, financial and other information concerning Balfour Beatty and Carillion has been extracted from publicly available sources or from Balfour Beatty's management sources.

 

The reference to the reduction in Balfour Beatty's UK construction revenue by up to two thirds is sourced from Carillion's merger proposals to Balfour Beatty.

 

Construction Products Association market forecasts can be found at www.constructionproducts.org.uk

 

Architectural Billings Index data can be found at www.aia.org

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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