Carillion plans to cut Balfour construction arm by two thirds

Grant Prior 10 years ago
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Balfour Beatty bosses are warning that Carillion’s planned takeover would lead to a drop in UK construction revenue by two thirds.

Turnover and staffing levels at the £2.8bn-a-year division would be decimated with regional construction hit hardest.

Carillion has spent this week trying to woo Balfour Beatty shareholders as its merger bid could turn hostile.

Carillion confirmed the move to the Stock Exchange on Thursday as it outlined cost-cutting plans of £175m for the merged group.

Balfour’s UK Construction Services division would bear the brunt of “synergies” with plans to scale it down in line with Carillion’s own recent strategy.

Balfour bosses described the Carillion plans as “partially eliminating” UK Construction Services.

Balfour said: “The substantial rescaling – possibly by up to two thirds – in the revenue of Balfour Beatty’s UK construction business would eliminate future earnings recovery potential.

“It would also incur cash outflows of many hundreds of millions of pounds of restructuring costs and working capital.

“In contrast, Balfour Beatty has clear plans for developing rather than partially eliminating the UK Construction Services business, including achieving future cost savings where 100% of the benefits achieved would accrue to Balfour Beatty shareholders.”

The scaling down would leave construction providing just one third of any merged group’s revenue.

Carillion’s latest announcement follows Balfour’s rejection of a revised deal on Monday when it said it had “lost confidence” in Carillion’s proposals.

Carillion said: “Carillion has, since Monday morning 11 August 2014, held meetings with a number of Balfour Beatty’s major shareholders.”

Carillion spelt out its cost-saving plans and proposed a one-off dividend of £59m for Balfour shareholders to sweeten the deal.

Carillion believes it can save cash by consolidating back office functions, improving IT and using the supply chain more efficiently.

UK Construction Services would also face a major revamp.

Carillion said: : “Carillion’s envisaged business plan for the group is to refocus significantly the UK construction services business in a similar manner to the rescaling it undertook in respect of its own construction business, principally through focus on contract selectivity, and to grow its services business, such that, within the medium term, two thirds of the combined group’s operating profit would derive from services and investments with one third coming from construction.

“The business plan envisages that overall, the combined group’s UK revenue would rise through the period, providing a cost base against which the synergies would be achieved.”

The moves would result in one-off costs – believed to be mainly redundancy payments – of £225m.

Carillion added: “Carillion continues to believe in the powerful strategic logic and financial benefits of a merger with Balfour Beatty and is therefore continuing to consider its position.”

Carillion also released a financial report for the six months to June 30 2014 which showed underlying pre-tax profit up to £75.9m from £73.5m last time on a reduced turnover of £1,871.0m from £1,964.6m.

Chairman, Philip Green, said: “Carillion continues to perform in line with the Board’s expectations, reflecting the benefits of the early actions we took in response to the economic downturn, notably the planned rescaling of our UK construction business, together with our continuing strong work-winning performance.

“Having realigned our businesses to the size of the markets in which we operate, the Group is well positioned to benefit from its strong work-winning performance over the last 18 months and from its high-quality pipeline of contract opportunities across our target markets.”

 

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