Global engineer Atkins has been tipped as a possible buyer of troubled Balfour Beatty’s engineering arm as the contractor celebrates some welcome successes.
The past few days have brought a number of good news stories to Balfour Beatty, the UK’s largest construction firm. Today, it announced that it had sold its £19m equity stake in one of the previous government’s Building Schools for the Future programme for £42m, thereby realising a 120% profit.
It also succeeded in selling its 50% state in the North Durham hospital for £55m. Although the company did not break down the profit it made on this project, it said that, together with the schools stake in the Liverpool suburb of Knowsley, it achieved a return that "exceed the directors’ valuations by £44m, representing an uplift of 82%".
We think the financials stack up for Atkins to buy– Will Wallis, analyst, Nomura Bank
Although these deals could reopen allegations in the UK that the Private Finance Initiative did not represent the best possible value for the taxpayer, they are certainly welcome news to the traumatised management of Balfour Beatty and its shareholders – especially as they come on the same day that Heathrow Airport’s refurbished Terminal 2 opens to the public, on time, to budget and without any of the confusion that marred the opening of Terminal 5 in 2008.
Indeed, the $1bn terminal was a triumph for Balfour’s concept of the integrated construction services company: a single firm that offers design, construction, ground engineering, M&E expertise and the professional services of Parsons Brinckerhoff, the US consultant that Balfour bought in 2009 for $626m.
And yet, the firm is still in trouble. After issuing a $50m profit warning last month it lost its chief executive and one-fifth of its market capitalisation. It also announced that it was looking for a buyer for Parsons Brinckerhoff, thereby abandoning its long-term strategy of becoming a global supplier of everything that is needed to put in place a construction project.
Indeed, the company has blamed clients’ lack of enthusiasm for its one-stop shop model as the reason behind its decision to sell, with UK chief executive Nick Pollard telling New Civil Engineer that client demand for such a model has not developed as expected.
One company tipped to benefit from Balfour’s strategic defeat is the multidisciplinary engineer, Atkins. After the profit warning, its shares rose more than 6% on City talk that it could usefully buy Parsons Brinckerhoff for about $1bn, part funded by a cash call.
Will Wallis, an analyst at Nomura bank, said: "We think the financials stack up for Atkins to buy. Management will need to make a judgment on cultural fit, and obviously Atkins is not the only possible buyer. However with the potential for a more geographically balanced business, and we estimate 10-15% earnings per share enhancement, we expect management to give it close scrutiny. We see the current share price as an attractive entry point."
If Atkins did take the plunge, the combined business would be among the top 10 global design firms, with a focus on infrastructure in general, and transport particular. It would also have particular satisfaction for Atkins’ staff who took part in its struggle to buy Parsons Brinckerhoff in 2009, when it lost out to Balfour.