According to Carillion, the revised takeover approach for Balfour Beatty offers a 36 per cent premium. Yet this sweetener depends on the 600m new shares you would create having the same market price – 337p each – as 430m now in issue. But it looks as if services group Carillion is actually offering a premium of around 12 per cent to the price for Balfour shares before merger discussions became public. This consists of a preferential share of the merged group – increased from 56.5 to 58.3 per cent on Tuesday – and an 8.5p dividend.
Baflour Beatty is right to label Carillion’s approach as “opportunistic”. Balfour is a late cycle business and, right now, it is at the bottom of the cycle. Still, Carillion have a brilliant management team and they are probably right on the synergies that could be achieved. A merger at this stage is unthinkable, leaving Carillion with the option to go hostile and pay for it. Whether or not the company has the financial firepower for such a sizeable acquisition, however, is highly questionable. Shareholders In BBY should sit tight and hold out for at least 350p a share. The construction & support sector is overcrowded and consolidation is overdue. Pinkers expects a wave of M&A in the next couple of years. Furthermore, as opposed to highly valued (overvalued?) consumer stocks, this sector is dirt cheap, offering healthy yields at low P/E ratios, even when measured on CAPE. So, what next? BBC1 failed. But in the age of ‘channel hopping’, there are more options. What about BBC2, for Balfour Beatty Costain, that is? Rather than returning money to shareholders from the impending sale of management consultancy Parsons Brinckerhoff for some £700m, Balfour could have a tilt at Costain, capitalised at a mere £270m. A nice idea… but even better: BBC3! The combined market cap of Carillion and Costain happens to equal that of Balfour Beatty: Roughly £1.6b. Now, this really would be a ‘merger of equals’ rather than the BBC1 ‘reverse takeover’. And the synergies would be enormous. A ‘no-brainer’, really. However… getting the three parties around a table would be a tall order, indeed. Whatever, one thing is for sure: All three companies are now ‘in play’ and change is in the air. Investors in all three companies should hold their nerve… and sit still! Watch this space! More on this subject: ‘Proof in the Pinkers!’ and ‘Undone!’.