Construction firm Balfour Beatty has again rejected a merger proposal from UK rival Carillion which had yesterday attempted to sweeten its offer with a cash dividend for Balfour shareholders.
According to Carillion, the two companies would save at least £175m (€218m, $292m) annually by the end of 2016 and overall the deal would translate into £1.5bn in savings for the combined entity.
However Balfour has published details justifying its rejection of the deal. The company said its board believes the proposed plan involves reducing Balfour Beatty's UK construction revenues by up to two thirds. Balfour said the merged value would be "materially lower" than the £1.5bn stated by Carillion, and that "cost savings driven by shrinking the business should not be confused with synergies".
"Such rescaling would require a significant reduction in overheads, just to maintain current margins (equivalent to more than 6% of the lost revenue)," it said.
Balfour also said there would be a £225m one-off cost associated with the merger which would be spread across 2015-16.
"In addition any capitalised value needs to take into account the associated costs of approximately £225 million, the value leakage from transaction and financing fees, and the net present value of working capital outflows," it said.
A disagreement over the inclusion of Balfour Beatty's US consultancy division, Parsons Brinckeroff, was what appeared to have originally derailed the merger talks; Balfour made clear that the sale process for Parsons Brinckerhoff was at an "advanced" stage.
The construction firm said the size and complexity of the merged business would be a challenge and that including Parsons Brinckerhoff "exacerbates the scale of the challenge at a time when the management would be undertaking a fundamental downsizing of the UK construction business".
"The implementation programme would be complex, requiring simultaneous business restructuring, integration and outsourcing, at the same time as a significant IT change programme which is already under way. This questions the applicability of historical benchmarks."
Balfour Beatty added that its shareholders would be better served by the company in terms of its risk profile and future profitability by going it alone.
"Balfour Beatty will be refocused as an Anglo-American construction and specialist services group where there is strong US market opportunity and UK margin recovery potential. The group's over-arching investments business is value creating and synergistic. Joint ventures in the Far East and the Middle East will be retained subject to them being value accretive," it said.
Carillion had appealed directly to Balfour Beatty's shareholders, adding an extra cash dividend of 8.5p per share if the deal goes through.