LONDON: Costain faces a fight with larger rivals to pull off a takeover of business services group Mouchel as other suitors look to take advantage of Britain’s recovering outsourcing market.

British engineer Costain, which maintains the United Kingdom’s motorways and works across the marine, energy and construction sectors, on Friday upped its bid from an all-share 152 million pounds to 172 million pounds in cash and shares, valuing Mouchel at around 153.2 pence a share.

The move, according to Reuters on Tuesday,prompted Mouchel to announce it was actively reviewing other approaches.

“Capita, Carillion and Balfour Beatty are interested,” an investor with a significant stake in Mouchel, said. “Capita could be keen on buying the whole group but the others might just want specific businesses.”

The three companies declined to comment when asked by Reuters if they were interested in bidding for Mouchel.

Costain Chairman, David Alley, believed there was a strong “strategic rationale” behind a combined group, which would have premium brands in consulting, construction and care, and an order book of more than four billion pounds.

Costain on Friday offered Mouchel 0.5531 shares and 30 pence in cash for each share in Mouchel, whose operations range from highway maintenance to consulting for UK local authorities.

Mouchel’s biggest investors want the company to enter takeover talks with Costain and back a deal on the terms offered, according to another top Mouchel shareholder.

“I know that three of the top Mouchel shareholders want to see completion and value crystallised,” the investor said.

“Mouchel need to clarify who else they are talking to and what benefits these approaches could bring to shareholders,” he added.

However, the investor points out that Costain only needs to persuade Mouchel’s top six shareholders, who own 53.75 per cent of the company, to accept their offer to push a deal through.

Mouchel, which was the subject of a 294 pence cash-and-share offer from defense services firm VT Group last February, has seen its shares halve since then after being hit hard by government cutbacks.

However, Espirito Santo analyst David Brockton believes Mouchel’s water, highways, outsourcing and consultancy businesses, all of which have slowed over the last year, are now bouncing back, making the company an attractive target.

“There should be a recovery at Mouchel — the water business is coming back, highways contracts being tendered and local government is outsourcing more activities — so there’s an opportunity and that’s why people are looking at them now,” said Brockton, who believes Costain’s bid is in the right ballpark.

“Had Mouchel deemed Costain’s bid to be unacceptable they would have rejected it but they didn’t so Costain’s latest offer must be there or thereabouts,” he added.

Arbuthnot analyst Kate Moy said Costain’s latest offer, which has been sweetened with 30 pence of cash, will cost around 33 million pounds of the 100 million pounds plus cash Costain had available at the end of 2010.

Mouchel is trading at 9.7 times 2011 earnings, compared with the FTSE Business Support Service Index’s 15.7 times, according to Thomson Reuters data.

Costain’s improved offer represents a premium of 35 per cent to Mouchel’s closing price of 113.75 pence the day before Costain made its latest offer. This values Mouchel at 12 times prospective earnings, prompting some analysts to question whether a higher cash figure could seal a deal.

“I don’t think Costain would make an all-cash bid because as a contractor it has a high degree of cash which is advance payments from clients so technically it’s not all of their cash,” said a senior banker, who advises support services firms.

“I’m not convinced Costain would want to gear itself up.”

Costain has so far declined to detail the “significant” cost savings it says a deal could bring. Espirito Santo’s Brockton says “there looks to be around 12 million pounds of financial and operational synergies, minimum.”

 

Source: Punch