Carillion plc and Balfour Beatty plc Surge After Merger Plans Revealed

Carillion plc (LON:CLLN) and Balfour Beatty plc (LON:BBY) both gain more than 10% after their plan to merge is leaked to the press.

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Although we don’t believe in timing the market or panicking over every stock fluctuation, understanding how a business is performing, competing and changing is vital to sensible investment.

There was good news for shareholders of construction groups Carillion (LSE: CLLN) and Balfour Beatty (LSE BBY) this morning. Carillion rose 11% to 376p and Balfour Beatty jumped 12% to 260p after they confirmed press reports that they were considering a merger.

The deal appears to be in fairly early stages, but the announcement did confirm that it was Carillion that popped the question, and that the merger would only proceed after due diligence by both parties and if both Boards recommended the deal to their respective shareholders.

Balfour BeattyAfter today’s share price gains, the combined entity would be worth around £3.4bn (£1.8bn for Balfour Beatty and £1.6bn for Carillion), and would therefore be on the cusp of qualifying for the FTSE 100 index.

Carillion has been the better performer of late, but is by far the smaller of the two in turnover terms. Its sales last year were £3.3bn, less than half of Balfour Beatty’s £8.7bn. Nevertheless, Carillion was more profitable in 2013, producing £110m in pre-tax profits versus Balfour Beatty’s £32m.

Balfour’s battering

The profit gap between the two groups is forecast to narrow in 2014, but Carillion should still retain a lead.

Balfour Beatty issued a nasty profits warning in May of this year, which saw its shares fall 20% in one day. It announced a strategic review at that time, saying that it was selling Parsons Brinckerhoff, the US-based design and engineering firm it acquired for £380m in 2009 (Balfour Beatty said today that it still planned to go ahead with this sale).

Balfour Beatty followed that piece of bad news with a further downbeat trading statement earlier this month. So, even after today’s share price jump, its shares still trade nearly 10% below the level they enjoyed prior to May’s profit warning. Some Carillion shareholders might be questioning what they are letting themselves in for.

What about the dividend?

The structure of the deal is yet to be agreed, but income investors will be keen to seen what is said about future dividend payments, should the deal go ahead.

Both companies are among the higher yielders on the market right now. On a historic basis, Balfour Beatty yields 4.9% and Carillion 4.7%, with small dividend increases expected this year.

Shareholders will have to wait for further news, but it seems to fair to say the market approves of the deal right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Stuart Watson has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.

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