Reports in the Sunday Times that the China Civil Engineering Construction Corporation (CCECC) is considering making a bid for Balfour Beatty, the UK’s largest contractor, has been treated with some scepticism in the City of London.
Although there is agreement that Chinese firms would like to enter the UK and European contracting markets, and there is little doubt that state-owned CCECC would be able to finance a purchase, analysts are questioning the choice of target and the timing of any offer.
If you were a Chinese firm looking for a foothold in the UK and Europe, why would you go for a business where half of its revenues are outside the UK?– Kevin Cammack, analyst at Cenkos Securities
Kevin Cammack, an analyst at Cenkos Securities, said: "It’s pretty clear that the Chinese are coming to town, so there’s a certain logic to the bid. However, you have to be somewhat surprised that they didn’t get involved when the business was on its knees at the end of last year. Balfour now has a new team in place and it’s in a market that’s showing signs of recovery, so it’s now able to defend itself."
One of the motives for a CCECC move would be to achieve the kind of vertically integrated model that the Chinese have favoured elsewhere.
With Chinese developers increasingly active in property development in the UK’s cities, and established Chinese interest in funding the UK’s high-speed rail schemes and nuclear new build programme, it had been predicted that a Chinese firm would seek to buy a contractor as a convenient way of entering the supply side of the market.
There had been speculation that a Chinese bidder would emerge after a planned merger with Carillion descended into farce in August last year. In that case, an Asian contractor was expected to play the role of white knight.
However, Cammack questioned whether Balfour was still the best choice of entry vehicle. He said: "If you were a Chinese firm looking for a foothold in the UK and Europe, why would you go for a business where half of its revenues are outside the UK? Balfour makes as much money in the US as the UK, where the regulatory environment would be extremely onerous for a Chinese contractor."
He suggested that a more likely choice would be a firm such as Costain. "They may not have the building side, but the civils business is strong and there would be no real dilution of overseas business. Costain has a philosophy of working for select list of clients. Would you lose any of those just because your ultimate parent was Chinese? In some areas, with clients like HS2 and National Grid, they might consider that it would actually provide better access to funding."
China Railway Construction, the parent of CCECC, is the second largest contractor in the world, with operations in more than 50 countries.
A report by law firm Pinsent Masons and the Centre for Economics and Business Research at the end of last year predicted that Chinese investment in the UK’s built environment would reach $169bn between 2014 and 2025.
Shares in Balfour Beatty rose 3.9% on the back of the takeover rumours.
Last week the China Harbour Engineering Company won a £300m civils package on the Swansea Bay tidal lagoon.
Image: Balfour Beatty workers on the Thameslink project in London (Source: Balfour Beatty)