John Laing mulls over new Balfour Beatty approach
JLIF made a £1 billion offer for the PPP assets of Balfour Beatty last week, highlighting the attraction of work on schools and hospitals for private sector firms.
Balfour rejected the bid saying the PPP contracts, which include long-term agreements to run projects such as schools and hospitals, were worth much more than the proposal.
As the sale would pave the way for the break-up of Balfour, the company warned that the loss of its Investment business would have an impact on its remaining construction and support services operations.
A statement from the firm said: “The Board of Balfour Beatty plc has carefully considered the non-binding proposal from JLIF to acquire its entire PPP portfolio for approximately £1 billion. The Board has concluded that the proposal falls significantly short of its own view of the value of the portfolio, and accordingly the proposal from JLIF has been rejected.
“The Directors’ Valuation of the PPP portfolio stood at £1.05 billion, as at 28 June 2014. However, the Group’s targeted approach to selling individual assets as each investment matures, combined with the current and expected future strength of the market, leads the Board to conclude that the realisable value of the PPP portfolio continues to be substantially in excess of the current Directors’ valuation. This has been recently evidenced by the disposal of an investment at a 28 per cent premium to the half-year Directors’ Valuation.
“As a result, the Board intends to publish an updated Directors’ Valuation in January 2015. This valuation will take into account recent contract wins, further investments and disposals in the period since June, and a further review of underlying project valuations. Separately, it will also seek to provide an indicative value range for the current investments pipeline. In combination, these will set out the Board’s view of a market value for the existing PPP portfolio and the pipeline.
“In addition, the strategic value and synergies from owning the current Investments business - both the PPP portfolio itself and the skilled team that operates and develops the business - is material to the Balfour Beatty group as a whole. The Group’s Construction and Support Services businesses derive real value from the Investments business being in the Group, something which needs to be taken into account in valuing the Group as a whole, and in evaluating any proposal to acquire the Investments portfolio or business alone. This has not been a factor in rejecting the JLIF proposal, given the substantial valuation gap versus the Board’s view of realisable value. Nevertheless, these broader synergistic benefits are of real value to shareholders, and will be further commented on at the time of publishing the January 2015 Directors’ Valuation.”
JLIF said in the meantime it “will continue to evaluate all other options for unlocking the portfolio. A further announcement will be made if and when appropriate”.
Its statement also revealed JLIF first approached Balfour Beatty in May 2014 with a proposal valuing the portfolio at a little under £1bn, which was rejected.
It said: “JLIF is disappointed that Balfour Beatty has chosen not to engage in constructive discussions with JLIF to unlock the value of its PPP Portfolio.
“JLIF first approached Balfour Beatty in May 2014 with a proposal that attached up to a £200 million premium to the then Balfour Beatty directors’ valuation of £766 million, leading to an indicative valuation for the entire Portfolio of a little under £1bn. This proposal was rejected.
“On 1 December 2014, having reviewed the Balfour Beatty directors’ portfolio valuation in August, taking into account disposals and new investments, JLIF made a non-binding proposal to acquire the entire Portfolio for approximately £1bn in cash, equivalent to 145 pence per Balfour Beatty share.
“Without access to the project data, any discussions with Balfour Beatty or further information, it is difficult to understand the basis on which Balfour Beatty is anticipating a substantial increase in valuation. The Balfour Beatty announcement this morning appeared to use the price of the recent sale of one asset for £61.5 million as evidence to support a substantial uplift in valuation for the entire Portfolio. JLIF believes this is overly optimistic, considering the evidence from the many transactions in which JLIF has been involved over the intervening months.
“JLIF continues to believe shareholder value for Balfour Beatty will be maximised by these assets being owned by an infrastructure fund with a lower cost of capital, which specialises in investing in low risk, operational infrastructure assets.
“JLIF’s proposal would allow Balfour Beatty to:
- Realise a certain and significant cash return for its shareholders, rather than relying on intermittent disposals in varying market conditions;
- Reduce its group costs;
- Further reduce the pension scheme liabilities;
- Improve the capital structure of the residual group;
- Continue its involvement in supply chain contracts and therefore retain any synergistic benefits; and
- Achieve the Board’s own stated objective of reducing complexity in the group.
“JLIF awaits with interest another revised valuation of the Portfolio from Balfour Beatty and in the meantime will continue to evaluate all other options for unlocking the Portfolio. A further announcement will be made if and when appropriate.”