By Li-mei Hoang LONDON (Reuters) - British support services and construction company Carillion (L:CLLN) made a bold move to capitalise on its successes with a possible 3 billion pound ($5.1 billion) merger with infrastructure firm Balfour Beatty (L:BALF).
Carillion and Balfour Beatty said in a statement late on Thursday that a merger would have the potential to create a company with market-leading services, investment and a construction business of considerable scale.
The deal would provide a lifeline to Balfour Beatty, which has struggled over the past 18 months after a string of profit warnings and the departure of its CEO Andrew McNaughton in May.
A merger between the two, which both employ around 40,000 people worldwide, could create a construction giant able to compete with players such as Spanish-listed Ferrovial (MC:FER) and France's Vinci (PA:SGEF).
Combined revenues could be more than 14 billion pounds with an order book of over 31 billion, and create 200 million pounds worth of annual savings, Whitman Howard analyst Stephen Rawlinson said.
"If some trading issues improve and the savings can be achieved, the combined entity would be a candidate for FTSE 100 entry as market capitalisation should get to 4 billion pounds," he added.
Shares in Carillion were up 7.9 percent at 365 pence by 1203 GMT (1.03 p.m. BST), the highest riser on the FTSE 250 index. Balfour Beatty shares were also up 7.8 percent at 250 pence.
Carillion, whose projects include the redevelopment of London's Battersea Power Station, has won a string of contracts in the past 18 months worth 10 billion pounds.
On Thursday, it announced it had been awarded three contracts worth up to 2.8 billion pounds in a joint venture with infrastructure firm Amey to deliver support services to Britain's Ministry of Defence.
Carillion, which maintains British railways, roads and military bases, said in March that it planned to diversify its facilities management or support services business into sectors such as oil, power distribution and highways maintenance.
A deal with Balfour, which operates in more than 80 countries providing construction, engineering and facilities management services, would significantly expand its international business.
Carillion, which has a market capitalisation of 1.5 billion pounds, currently operates in Britain and Ireland, Middle East and North Africa and Canada.
By contrast, Balfour shares have fallen by 20 percent since the start of the year after repeated profit warnings.
The company, which has a market capitalisation of 1.6 billion, also said in July it would take another 35 million pound hit to its profit after trading in its mechanical and electrical engineering division deteriorated.
Balfour is undergoing a strategic review of its business and put its U.S. project management business Parsons Brinckerhoff up for sale, which will be not be affected by the merger talks.
It is expected to post a 20 percent fall in annual pretax profits of 150.30 million pounds, according to an average estimate of 13 analysts polled by Thomson Reuters.
"Balfour Beatty's recent operational performance has been extremely poor. It does not have a chief executive. Its shareholders are frustrated," said Liberum analysts.
"It is far too early to assess terms or levels, but we expect an acquisition of Balfour Beatty would be 20 percent accretive to Carillion. We believe that this deal would be comparable to the Babcock and VT deal in the contracting space, which created value for all concerned," they added.
The companies have until Aug. 21 to announce a firm intention to merge or state that a deal will not take place.
(Editing by Kate Holton and Ruth Pitchford)