Is Balfour Beatty plc A Buy Without Its US Services Business?

Balfour BeattyAnyone who followed the saga of the failed merger between Carillion and Balfour Beatty (LSE: BBY) will remember that one of the biggest sticking points was Balfour’s plan to sell its US professional services business, Parsons Brinkerhoff, and return cash to shareholders.

The sale was a complete non-starter for Carillion, but Balfour was determined, and has now delivered on its promises to shareholders.

The deal

Balfour is selling Parsons Brinckerhoff to Canadian infrastructure services firm WSP Global for £820m, although the real value of the deal is £753m, as £67m of cash will be retained with the Parsons business.

As part of the deal, Balfour plans to return £200m to shareholders, which is equivalent to around 29p per share.

Of the remainder, £85m will be used to reduce Balfour’s £397m pension deficit, a whopping £80m will be spent on transaction fees, taxes and separation costs, and the remaining £388m will be used to “ensure a strong balance sheet“, according to the group.

Good news for shareholders?

Balfour paid £380m for Parsons Brinckerhoff in 2009, so today’s deal seems a decent return on investment.

However, we also need to look ahead, and consider how much of Balfour’s profits will disappear with the Parsons business.

According to today’s announcement, the £753m sale price equates to 11 times Parsons’ underlying earnings before interest, tax, depreciation and amortisation (EBITDA) from last year.

This represents around £68m of underlying earnings. To put this into context, Balfour’s underlying group operating profit was £203m last year.

Building profits?

Balfour’s turnaround plan is built on returning its UK construction business to profitability, and continuing to grow its US construction arm. In the meantime, the firm aims to continue selling selected infrastructure assets from its public-private partnership portfolio.

In my view, there’s still a long road ahead — during the first half of this year Balfour made £72m profit from selling PPP investments, but its construction division made a loss of £69m.

The Parsons business was a reliable source of profits, and may be missed.

Buy Balfour today?

Balfour shares rose briefly when markets opened this morning, but have since sunk back — unsurprisingly, in my view.

I believe Balfour shares are already fully valued, and suspect they will get cheaper, especially as the firm said that the group dividend would be “reassessed” — code for a possible cut — following the sale of the Parsons Brinckerhoff business.

Balfour Beatty may make a strong recovery, but I think the firm's shares could yet return to their 52-week low of around 200p.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.