Balfour Beatty, the UK’s largest contractor, sent a circular to its shareholders on Friday to ask them to approve the sale of Parsons Brinckerhoff, its professional services subsidiary, and to warn them that if the sale does not go ahead, it may breach its agreements with its bankers.
The firm is hoping to complete the sale of Parsons to Canadian consulting engineer WSP for $1.3bn before the end of the year. The circular warned shareholders that if the deal does not go ahead, it’s banking covenants, such as the allowable ratio of the group’s earnings to its net debt, may become more difficult to meet.Â
It said: "If the transaction does not proceed and there is a further modest deterioration in the profitability of the group, the board will need to consider alternative ways of raising or conserving cash." These might include forced sales of asset, such as those in its PPP portfolio.Â
It added that "asset sales are likely to remain the board’s preferred mitigating action", but only if the board could obtain market prices. The circular also warned shareholders that dividends may be "cancelled, reduced or postponed" in the absence of a sale. If the sale goes ahead, the board has promised shareholders that it will buy back $320m of shares and use $135m to reduce its pension liability.
It also warned that a breach of banking covenants would constitute a default, and could cut off the company’s access to credit, or even lead to the foreclosure of loans.Â
The circular invited shareholders to a general meeting on 28 October at the headquarters of Goldman Sachs in London.Â
The Balfour group’s performance has suffered significantly this year. The losses have been caused by problem contracts in its contracting and M&E work, mostly in the south of England. At the end of last month it issued its fifth profit warning in less than two years, which sent its share price plunging more than 20% to their lowest level since 2003.
By contrast, PPP deals in which it holds an equity stake have done well, thanks in part to the recovery in the UK economy. In August the company estimated that its UK portfolio had risen 63% to $1.3bn, and its global holdings had risen by 46% to £1.7bn, as at June 2014.
The group also announced the disposal of its 50% interest in the Pinderfields and Pontefract Hospital PPP project, in West Yorkshire, UK. The sale generated a profit of $67m. In addition, it reached financial close on a multi-family housing project in Florida and was appointed preferred bidder for two student accommodation projects at the universities in Texas, USA and Wollongong in Australia.
Ian Rylatt, chief executive of Balfour Beatty Investments, said of the hospital deal: "This supports the substantial increase in the directors’ valuation of the PPP portfolio, while also demonstrating that the valuation maintains a level of prudence. We continue to see a strong pipeline of opportunities and therefore, in line with our strategy of recycling equity, the proceeds will be invested in new projects as we continue to diversify our business."
In September Balfour announced that its joint venture with Amec and US engineer Jacobs had been appointed to a framework contract to provide a nuclear waste processing plant at Sellafield in north-west England. The joint venture will each take a third of the work on a contract that is thought to be worth up to £540m, and will construct a "box encapsulation plant" that will receive, segregate and encapsulate hazardous waste stored on the Cumbrian site.