Carillion has held a number of meetings this week with Balfour Beatty’s major shareholders outlining the benefits of its merger bid, which includes a one-off dividend of £59 million for Balfour’s shareholders.
Carillion’s Board said it was making public all material new information given during the meetings at the request of the Panel on Takeovers and Mergers and the shareholders.
Carillion is confident that, as a direct result of the merger, the cost-base of the combined group could be reduced by at least £175 million per annum by the end of 2016 and that earnings would consequently be significantly enhanced from that year.
The directors of Carillion believe that £82 million of annual recurring cost savings from back office, head office, business and support functions can be made as well as from applying Carillion’s business operating model to Balfour Beatty’s UK business, with a further £36.5 million of annual recurring cost savings from the supply chain by utilising Carillion’s category management and demand planning solution, and through purchasing and procurement efficiencies. Other annual recurring cost savings include:
- £13 million of cost savings on ICT
- £17.5 million from consolidation of the two groups’ property portfolios in overlapping areas, including head office
- £26 million from agency labour, fleet, insurance and general overhead savings, including through the application of Carillion’s lean operating structure
The Board of Carillion said it would “deliver these synergies progressively, anticipating that 40% of them would be achieved by the end of 2015 and the full 100% by the end of 2016, on the basis that themerger would be completed by 31 December 2014.”
“ It is expected that the realisation of the identified synergies would result in one-off exceptional cash costs of approximately £225 million, largely incurred in financial years 2015 and 2016.”
The statement says that the directors of Carillion have assumed that there will be no significant impact on the underlying operations of either business or their ability to win business from customers.
Carillion has proposed that Balfour Beatty’s shareholders receive an additional cash dividend (or equivalent) of 8.5 pence per Balfour Beatty share (£59 million in total) at the time Balfour Beatty’s final 2014 dividend would have otherwise been paid in 2015. This would be in addition to the final 2014 dividend they would be entitled to receive as shareholders in the enlarged group.
On financing, based on initial discussions with banks and assuming the retention of Parsons Brinckerhoff, the Board of Carillion is “highly confident” that £3 billion of available funding would be accessible to the combined group, providing substantial headroom above its actual borrowing requirements after transaction costs and the costs of the proposed restructuring.
Balfour Beatty’s UK Construction Services would see a major restructuring if the deal goes ahead. 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.”
Carillion pipeline of contract opportunities increases to £38 billion
Carillion has also released its half yearly financial report for the six months ended 30 June 2014 this morning. Underlying pre-tax profit up was up to £75.9 million from £73.5 million in 2013 on a reduced turnover of £1,871.0 million from £1,964.6 million.
Carillion described work winning as remaining strong, with £3.2 billion of new orders and probable orders in the first half. Total orders plus probable orders increased to £19.5 billion at 30 June 2014 (31 December 2013: £18.0 billion)
The firm’s pipeline of contract opportunities has also increased to £38.0 billion (31 December 2013: £37.5 billion, with 93% revenue visibility for 2014 (2013: 93%). Carilion said that full-year targets for revenue growth unchanged, despite markets remaining challenging.
Chairman Philip Green commented:
“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.”
On the proposed merger, Carillion said it believed finalising due diligence would take between 3 to 4 weeks from re-engagement with Balfour Beatty. The Board said it will make a further announcement in due course. However, Carillion is reserving the right to make a revised offer for Balfour Beatty at any time on less favourable terms, including if the announcement of a firm intention to make an offer for Balfour Beatty on less favourable terms by a third party.