John Laing Infrastructure Fund (JLIF) has offered to buy the investment portfolio of the UK’s largest contractor, Balfour Beatty, which includes around 60 public-private partnership (PPP) contracts.
The fund issued a statement today saying it was “making a non-binding proposal, subject to due diligence, to the board of Balfour Beatty for its PPP portfolio for approximately £1bn ($1.5bn) in cash”.
About $1.25bn of the assets in question are in the UK, and include London’s M25 orbital motorway (pictured), the Queen Elizabeth hospital in Birmingham and student accommodation in Aberystwyth, Wales.
Assets outside the UK include military housing projects in the US. There was some uncertainty in the City as to whether the offer covered the whole of Balfour’s portfolio, or just those assets located in the UK.
Andrew Gibb, an analyst at Investec, told GCR: “This is a sticking point. The announcement does say the PPP portfolio, which I would assume is the UK and the US, however the view has always been that the military housing is not really a liquid asset, so it’s not entirely clear at this stage what the billion is for.”
He added: “One thing is that if it’s for all the assets, it’s below the directors’ valuation, another is that if you look at the recent deals that Balfour has done it’s clear that there’s huge demand for this kind of asset, and there is a pretty experienced team within Balfour’s investment decision, so there should be some goodwill for them.”
A spokesperson for JLIF confirmed to GCR that the offer was for the entire PPP portfolio.
Balfour’s response
Balfour issued a press release this morning saying: “The board of Balfour Beatty will review the proposal once it is received from JLIF. A further announcement will be made in due course, as appropriate. As previously stated, the board remains open to value creation opportunities across the group while it concentrates on the restoration of value to its shareholders.”
Kevin Cammack, an analyst at Cenkos Securities, told GCR that it was unlikely that Balfour would accept the offer as it stands. He said the PPP portfolio underpinned the Balfour’s financial position.
“The special purpose vehicles that built the projects are funded as standalone projects, but they’ve been quite a comfort to the banking structures behind the group. If they were sold, any surplus would go on paying off the bank debt, and it would open the door to a pretty full break-up of the group.”
Balfour’s non-committal response to JLIF’s offer may reflect the fact that the board is without a chief executive. Leo Quinn, the man who was hired from technology company QinetiQ in October does not begin work until the new year.
Cammack said: “Balfour’s response will give a big signal as to how the new chief executive sees the business going forward. I know he doesn’t start until 1 January by all accounts he’s been making his mark already.”
Long suffering shareholders
Over the summer Balfour fought off a semi-hostile merger bid from fellow UK contractor Carillion that valued the company at about $3bn.
Balfour became a takeover target after it issued five profit warnings in less than two years. The warnings, which were caused by underperforming contracts in the UK, have led to a halving in the company’s share price over the past year.
The contracts are presently being reviewed by KPMG, which is expected to report its findings at the end of this month.
The takeover became dependent on Balfour’s sale of its Parsons Brinckerhoff professional services arm.
Although the disposal process had begun when Carillion made its initial offer, it later made its bid conditional on Balfour retaining ownership of Parsons. Balfour refused to comply, after which both parties attempted to woo Balfour’s shareholders with offers of dividends and buybacks.
Balfour indicated that it would offer shareholders £200m of the £753m it received from the sale of Parsons to Canadian engineer WSP last month.
However, Investec’s Gibb said: “It’s looking less and less likely that that £200m will find its way into shareholders’ pockets. A lot will depend what comes out of the KPMG review. Clearly these monies were promised before Mr Quinn was at the helm. In these circumstances £1bn in cash up front would be very attractive. It would eradicate balance sheet concerns and it may enable them to do a return to shareholders and offer a dividend.”
News of the offer pushed shares in Balfour Beatty up more than 4%, whereas John Laing’s shares lost more than 2%.
Photograph: The M25, London’s orbital motorway, is among the assets under offer
