Balfour Beatty and Carillion discuss merger

Just three weeks after a fourth profits warning in two years and plunge in its share price to a near-six-year low, Balfour Beatty shareholders finally have something to cheer about. With the City rumour mill in full-swing, the construction company was forced to admit talks about a possible £3.3 billion merger with support services firm Carillion are on.

Balfour shares rocketed by up to 13% and Carillion - more successful in recent years - by slightly more, although management - especially rudderless Balfour - would clearly have liked longer to thrash out a deal.

"No final decision has been reached regarding the structure of any merger," they admitted. "Work is now underway to develop a strategy and outline business plan for a combined entity, underpinned by the evaluation of achievable synergies, future financing arrangements and a number of other essential supporting workstreams."

Working without a man in the hot seat at Balfour - Andrew McNaughton lost his job after a savage profits warning in May - does not make things any easier. It’s also why Carillion boss Richard Howson will likely run the enlarged business if the two firms agree terms.

They've got until 5pm on 21 August to work it all out. Balfour shareholders must hope that they do.

Earlier this month, the company warned of a £35 million profits shortfall this year. Balfour blamed contractual disputes, project delays, design changes and project re-work, mainly in London. A "slow market" has hit new orders, too, which accounts for £5 million of the hit to the bottom line.

Analysts at Jefferies were certainly nervous. "There is no guarantee that there will not be a fifth," they said on the topic of Balfour's apparent penchant for profit warnings.

In reaction, Balfour's top brass has decided to scale back the division to focus engineering services in central London only on jobs with group companies where it can influence design and add value to customers.

Thankfully, business elsewhere is steady, and that £35 million hole will likely be filled by gains on PPP disposals over the next few months. That should keep Balfour on track to make a pre-tax profit of between £145 million and £160 million this year. Its order book at the end of June was pretty stable, too, at £12.9 billion.

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