A circular issued by Balfour Beatty to its shareholders is warning that the group could be at risk of financial default if they fail to approve the sale of Parsons Brinckerhoff – but also warns of risks if the sale gets the go-ahead.

A General Meeting will take place 28 October 2014 to seek sharehold approval of the Resolution to sell Parsons Brinckerhoff  to WSP Global Inc.

If successful, upon completion of the disposal of Parsons Brinckerhoff, the Balfour Beatty Group will comprise:

• a top tier construction businesses in the UK and US;
• a leading investments business;
• a services division with a number of specialist construction and asset management businesses; and
• construction joint ventures in the Far East and Middle East.

Balfour Beatty acquired Parsons Brinckerhoff in September 2009 for £382 million. At the time of the acquisition, the Board believed that the Group would benefit from having a presence across the entire life cycle of major infrastructure assets. However, while Parsons Brinckerhoff has grown under Balfour Beatty’s ownership over the past five years, a strategic review by the Board earlier this year concluded that having professional services and construction capabilities combined under one organisation had not led to a material competitive advantage for the Group and had also added significant complexity to the Group. The circular says:

“The Board believes that this is unlikely to alter significantly in the foreseeable future and is a potential constraint to the growth of both Parsons Brinckerhoff and the rest of the Balfour Beatty Group.”

The Board decribed the proposed sale price of £820 million as “an attractive value for the business, which fully recognises Parsons Brinckerhoff’s leading market positions and growth opportunities.” In 2013, Parsons Brinckerhoff generated revenues of £1,569 million, underlying profit from operations of £56 million, underlying EBITDA of £69 million and profit before tax of £27 million. As at 27 June 2014, the order book stood at £1.3 billion and gross assets were £0.8 billion.

Balfour Beatty is expected to receive net cash proceeds of approximately £673 million from the sale. The Board said the Group’s strategic priorities would then focus on maximising Shareholder value from core construction and investment activities in the UK and US, including:

• 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; and
• realising indirect overhead savings and shared service efficiencies across the Group.

At the divisional level, Balfour Beatty’s strategy will focus around the following key areas:

UK Construction Services:

• Continue the turnaround of UK Construction;
• Progressively return margins in our regional construction business to peer group margins through, amongst other things, more selective tendering. This includes realignment of bidding to the customers, geographies and sectors with the best pipeline of profitable work and focus on repeat customers, frameworks and larger contracts over £5 million;
• Further enhance its work-winning effectiveness in Major Projects, through the development of closer customer relationships; and
• Stabilise Engineering Services by resizing downwards to specific markets with higher margins and increasing the proportion of internal work, in support of building operations;

US Construction Services:

• Continue to realise the benefits of the strong construction business in what is a growing US construction market; and
• Continue to drive improvement in visibility of future opportunities in the division’s target sectors.

Support Services:

• Continue to provide specialist construction and asset management services to major infrastructure clients which naturally complement and enhance the Group’s construction and investment activities;
• Focus on sectors that provide attractive growth and margin prospects, as well as a longer-term order book; and
• Over time, leverage skills across the Group’s  Anglo-American footprint to tap into select growth opportunities.

The company announced on 13 August 2014 that first half trading and financial performance had seen a further worsening in the trading performance of the mechanical and electrical engineering part of the UK Construction Services business. At that time, it was also announced that the Regional and Major Projects businesses within UK Construction Services continued to perform in line with expectations. The Support Services division delivered good performances and increased profitability underpinned by highway services contracts and rail renewal activities, as well as a significantly increased order book in the water sector as a result of the award of several new contracts in the first half under the AMP6 regulatory cycle.

On 29 September 2014 the Group announced further a profit shortfall for the full year of approximately £75 million in the UK Construction Services business.

The Circular has set out key risk factors shareholders need to take into account when considering whether to vote in favour of the Resolution. Balfour Beatty chairman Steve Marshall said:

“If Shareholders do not approve the Transaction, the Group is expected to have less headroom on net debt to EBITDA covenants given as part of its funding arrangements. “

In this event, the Circular says the Board has a number of mitigating actions available which could be taken to address the potential risk of such a covenant breach -  in particular accelerating the disposal of investment assets.

The Circular also warns shareholders:

 “If the transaction does not proceed there is a risk that Parsons Brinckerhoff’s management may be demotivated within the Balfour Beatty Group and that its staff may be poached more readily by competitors. If the industry as a whole moves towards consolidation, Balfour Beatty may lose market share if it cannot execute the transaction. These factors may adversely affect the Group’s future prospects, financial condition or results of operations.”

… but risks if the sale gets shareholder go-ahead

The Circular also sets out risks which could arise as a result of the sale getting the go-ahead, stating:

"Following completion, the retained Group will be less diverse. In addition to its core construction businesses, Parsons Brinckerhoff provides the Group with a global professional services business, enablingit to offer a more comprehensive range of services and operate in a wider range of geographies. Followingcompletion, the retained Group will no longer benefit from this geographic and sector diversification."

"The earnings of the retained Group will be more cyclical as a result and this will be heightened by its increased exposure to the United Kingdom and United States construction markets, which are also cyclical in nature. Any material reduction in earnings could have an adverse effect on the financial condition of the retained Group and its results of operations."

"No integrated offering could affect ability to win tenders on key projects"

"The Group seeks to win profitable work through bidding for contracts, operating in highly competitive markets. Its success depends on its ability to identify, price and execute the right volume and quality of bids to compete successfully in these markets and maintain a profitable, sustainable order book. This in turn requires it to operate a competitive business model and overheads."

"The Retained Group will no longer be able to provide an integrated offering of consultancy and construction services in most markets without project-specific joint ventures or arrangements with consultancy companies. This may affect the retained Group’s ability to win tenders on key projects, respond to customer demands or increase sales to existing customers, which may in turn adversely affect its future prospects, financial condition or results of operations.”