By Mark Kleinman, City Editor
Two of Britain's biggest construction firms are in merger talks to create a £3bn powerhouse whose flagship projects would include London's Olympics Aquatics Centre and the redevelopment of Liverpool's Anfield home.
Sky News can exclusively reveal that Balfour Beatty, which is struggling after sacking its chief executive more than two months ago, is in detailed discussions with Carillion about a combination of the two companies.
If successfully completed, a deal would put the merged group on course for entry into the FTSE-100 index.
Balfour, which has a market capitalisation of £1.6bn, has seen its shares perform poorly, while shares in Carillion, which is valued at £1.45bn, have risen by more than 13% during the last 12 months.
"This would create a national leader and a world-class support services company," said one person familiar with the talks.
The two groups are likely to come under pressure from the Takeover Panel, the City's mergers watchdog, to confirm their discussions as soon as Friday, although a deal is far from certain to be finalised and could take until September to be formally announced.
Analysts said a tie-up would create scope for millions of pounds in cost savings at a broader-based infrastructure services group, with Carillion traditionally strong in the services area and Balfour Beatty having a successful track record in construction.
It is unclear how advanced the plans are although Richard Howson, the highly-regarded chief executive of Carillion, is likely to run the merged entity if they come to fruition.
Both Balfour and Carillion count the UK Government among their biggest customers, having profited from the explosion in the volume of private finance initiative projects in recent years.
Balfour won a £160m contract last month to construct a new maintenance facility at the Sellafield nuclear power plant, while earlier this week it was awarded a deal by the Highways Agency to upgrade a 13-mile stretch of the M3 to become a "smart motorway".
Andrew McNaughton, Balfour's chief executive, was ousted in May after little more than a year at the helm.
In its most recent profit warning, announced earlier this month, Balfour blamed a deterioration in the performance of its UK construction business, but insisted that its balance sheet remained in good shape.
Balfour is likely to continue to pursue a sale of Parsons Brinckerhoff, its US-based consulting and engineering group, regardless of the outcome of discussions with Carillion. Balfour said it would explore a sale of the business, which it bought for $600m (£354m) in 2009, earlier this year.
"As anticipated at the time of the acquisition (in 2009), there has been growth in the market towards design and build and Public Private Partnership contracts," it said in May.
"However, having professional services and construction capabilities combined within one organisation has not delivered material competitive advantage for the Group."
A number of private equity firms and trade buyers are understood to remain interested in buying the US business.
Carillion has enjoyed a more productive period, winning the Anfield redevelopment project earlier this month and boasting a total order book of £18.5bn, according to its most recent update to the City.
Shares in Balfour closed down 1.1% on Thursday at 232.1p, while shares in Carillion ended 0.65% higher at 338.5p.
Spokesmen for Balfour Beatty, which is being advised by Goldman Sachs, and Carillion, which is using Lazard, declined to comment.
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