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Shares in Carillion surge on potential Balfour merger benefits

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Shares in Carillion (LON:CLLN) surged as markets lapped up its rationale for merging with rival building contractor Balfour Beatty (LON:BBY).

Costs can be reduced by at least £175mln annually by the end of 2016, with a significant kicker to earnings from that point on.

Broker Investec estimates that savings on that scale would be the equivalent to £1.65bn in incremental market value, a material increase with Balfour currently worth £1.6bn and Carillion £1.5bn.

The identified synergies would result in one-off exceptional cash costs of around £225mln, largely incurred in financial years 2015 and 2016.

Carillion has also proposed that Balfour Beatty's shareholders receive a 8.5p dividend bump-up at the end of 2014 on top of any payment by the enlarged group.

The details followed a request fro the the Takeover Panel that details of its proposals discussed in the talks between the two companies be published.

A sticking point remains the future of that Balfour’s up for sale Parsons Brinckerhoff business, which Carillion seems convinced should remain part of the enlarged group and be recapitalised.

Investec concurred, adding that at a time when attention should be on attempting to reverse the fortunes of its UK construction division it seems odd to sell a division that is so important to current profitability.

The need to retain this business in the short term may reflect Carillion’s view on the current state of Balfour Beatty’s construction division and the scale of the task to turn it around, the broker added.

Earlier, Carillion unveiled underlying first half profits of £75.9mln before tax (£73.5mln).

Shares were trading almost 8.5% higher at 347p while Balfour Beatty was 1.4% to the good at 240p.

Quick facts: Carillion

Price: 14.2 GBX

LSE:CLLN
Market: LSE
Market Cap: £61.1 m
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