Bovis merger threatens WS Atkins' share price

Should the merger with Bovis go ahead, WS Atkins runs the risk of being reclassified by the Stock Exchange - moving the company from the support services sector to construction would risk a plunge in Atkins' share price to less than a third of its current value.

Shares in support service companies typically trade at 30-times their earnings, whereas many of those in construction trade at a multiple of less than 10.

"Adding a construction turnover of £1.9 billion would introduce a serious risk of this being seen, in the eyes of the Stock Exchange panel, as Atkins' dominant activity," said the chief executive of a top-20 construction group. "I'm surprised at the deal."

He commented: "Bovis is a construction player and that's not harmonious with the direction Atkins has been moving in." He saw US construction group JA Jones as a better match for Bovis.

Shareholders in Atkins have shown a marked lack of enthusiasm for the Bovis deal. Following last week's announcement, Atkins' share prices fell heavily for two consecutive days.

"The City is cautious," said Ric Piper, Atkins' finance director, "but there are people saying this could be a good deal."

Everything hinges on the price Atkins would be willing to pay, according to Mike Betts, construction analyst with stockbroker Goldman Sachs. When Sir Frank Lampl, chairman of Bovis, first started knocking on doors he was asking £350 million for the business that conglomerate P&O, owner of Bovis, now sees as non-core.

If Atkins has worked that figure down to £200 million it would be "nearer the mark" according to another analyst.

"Bovis is primarily a fee-based business, it is not a traditional contracting business that takes on huge risks," said Betts. "The big question, if the deal goes through, is would other consultants follow?"

Skanska has highlighted its desire to play a wider role in construction, from concept through to demolition. In addition to expectations that it will snap up an fm business, it could also become involved in design and pre-contract work by chasing a consulting engineer, selecting any one of Atkins' rivals.

P&O started its withdrawal from the construction market last year with the £226 million flotation of Bovis Homes.