Balfour Beatty’s board is considering a £1bn offer from John Laing Infrastructure Fund to buy its portfolio of PPP projects – a bird-in-the-hand proposition that could possibly be attractive to weary shareholders after five profit warnings in two years.
But market sentiment yesterday was that JLIF had submitted an opportunistically low bid for the health, education and transport assets, and that other prospective bidders could emerge, creating an auction situation.
The £1bn bid is below the Balfour Beatty board’s own £1.051bn valuation of its PPP assets in the UK and US, updated in August 2014 from a £766m valuation in December 2013 after a change in valuation methodology.
Later, in October, Balfour Beatty achieved £61.5m for Pontefract and Pinderfields PPP Hospital, exceeding its expectations.
Andrew Gibb, an analyst at Investec, speaking to Global Construction Review, said: “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 division, so there should be some goodwill for them.”
The assets are believed to include the Queen Elizabeth hospital in Birmingham
JLIF is understood to be contacting shareholders directly to drum up support for a deal, which could prove more attractive than the alternative of waiting for the group to return to strength. One industry commentator suggested to Construction Manager that shareholders might want to “take the money and run”.
“It could be a get out of jail free card. Even after the sale of Parsons Brinckerhoff, Balfour Beatty is still on the wrong side of break even. The shareholders have already taken all the write-downs on contracts, and most people expect further write-downs with the [completion of the] KPMG review,” he said.
If Balfour Beatty’s board decides to sell its entire PPP portfolio, this would leave a pure contracting business operating in the UK, US, Hong Kong and Middle East.
However, the commentator argued that because projects built on behalf of its PPP arm typically achieve much higher margins than competitively-bid contracts, losing the PPP portfolio would make it harder for Balfour Beatty to grow the remaining business.
Meanwhile, Kevin Cammack, an analyst at Cenkos Securities, told Global Construction Review that it was unlikely that Balfour would accept the offer as it stands, as the PPP portfolio underpinned 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,” said Cammack.
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The 60 assets in the UK and US that JLIF hopes to buy are thought to include: four major hospitals, including the Queen Elizabeth Hospital in Birmingham; eight UK schools; and 13 roads projects, including a 40% stake in the Connect Plus consortium, which has a 30-year concession to maintain and upgrade the M25.
It also includes three student accommodation projects, including the still-incompleted £45m Fferm Penglais in Aberystwyth. Students were due to move in during November, but a statement on the university’s website indicates that this has now been postponed until late January.
Yesterday, there was also uncertainty as to whether incoming chief executive Leo Quinn would be able to orchestrate Balfour Beatty’s response to the bid. Quinn is due to take up his post on 1 January, but a report in Building magazine last week gave the impression that he has started to take up the reins.
Kevin Cammack told GCR: “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, but by all accounts he’s been making his mark already.”
However, the industry commentator quoted above felt that Quinn’s input would be limited due to his contractual commitment to his current company, Qinetiq. He also pointed out that finance director Duncan McGrath and chairman Steve Marshall are also heading for the exit, while Balfour Beatty has also just lost two non-exec directors.
News of the offer pushed shares in Balfour Beatty up more than 4%, whereas John Laing’s shares lost more than 2%.
