Balfour Beatty has rejected a revised merger proposal put forward by Carillion after Balfour announced on 31^st July that discussions had been terminated – with ongoing disagreement around the sale of Parsons Brinckerhoff a key reason for the breakdown in negotiations.

Carillion initially approached Balfour Beatty on 27 May 2014 with a nil premium merger proposal whereby the ownership split would have been 51% of the combined entity to Balfour Beatty shareholders and 49% to Carillion shareholders.

Following negotiations, Balfour Beatty agreed to engage with Carillion at the end of June on the basis of the following key terms:

All-share combination with 56.5% undiluted ordinary equity to Balfour Beatty shareholders; 43.5% to Carillion shareholders. Respective percentage shares fixed with no variation with any share price movement

Confirmation from Carillion that they were supportive of the Parsons Brinckerhoff disposal process and in the event of a leak, a joint leak announcement would be released including a public statement of support for the sale process from Carillion, subject to achieving acceptable value and terms for this business

At Carillion’s request, the equity split was predicated on Balfour Beatty retaining the proceeds from the sale of Parsons Brinckerhoff as freely available cash.

Following agreement of the terms of engagement discussions between Balfour Beatty and Carillion continued until a meeting on 30 July when it was first communicated to Balfour Beatty that Carillion wished to change the terms and to retain the Parsons Brinckerhoff business.

This followed the joint leak announcement on 24 July and the presentation by Philip Green, Chairman of Carillion, and Richard Howson, CEO of Carillion, to the Board of Balfour Beatty on 28 July where the terms were reaffirmed. Following the meeting on 30 July, Balfour Beatty announced that discussions had been terminated on 31 July on the basis of a fundamental concern regarding the proposed treatment of Parsons Brinckerhoff.

Balfour Beatty has confirmed that its chairman, Steven Marshall met Carillion’s chairman, Philip Green to discussed a revised set of  terms on 3rd August.

At the meeting Mr Green proposed to keep the 56.5% / 43.5% split of the business as previously agreed but made the following changes and additions to the key terms of the proposal:

• Parsons Brinckerhoff to remain in a combined business with Carillion to cover appropriate bidder costs for the remaining bidders in the sale process, if the bidders could be persuaded to proceed on the basis that the merger did not ultimately happen
• Extension of the Put-up or Shut-up deadline to 28 August with the interim results for both companies deferred to the same date.

In a statement, Balfour Beatty’s Board said it had “carefully considered the revised proposal from Carillion including the business plan for the combined business” but concluded that “there are a number of significant risks many of which cannot be mitigated.”

 The risks include:

• The risk of undermining the Parsons Brinckerhoff sales process which is a key strategic objective of the Group, particularly as there is no strategic logic for its retention other than to enhance the earnings of the combined group
• Bidders for Parsons Brinckerhoff may not regard the cost cover as adequate to remain fully committed to the process with the resultant risk that the sale process would be terminated
• Risk that a failed sale process would materially impact the motivation and retention of Parsons Brinckerhoff management and employees and damage its competitive position in a rapidly consolidating professional services market
• Impact of terminating the Parsons Brinckerhoff sale process would be compounded if the merger with Carillion did not complete, in which case any associated loss of value would be entirely for the account of Balfour Beatty’s shareholders
• Significant execution risk associated with the integration of the two businesses would be substantially increased by any material revenue reduction in Balfour Beatty’s Construction Services UK business
• Any material reduction in Balfour Beatty’s revenues in Construction Services UK would create unacceptable operational and financial risks
• Remove profitable business opportunities, taking away future earnings recovery potential
• The risk of engaging in detailed due diligence with a competitor while having serious reservations about the transaction and its deliverability

The Board said:

“In light of these considerations on the revised proposal, the Board has lost confidence in the likely delivery of a successful transaction and has therefore concluded that the current proposal from Carillion is not in the best interests of Balfour Beatty shareholders.”