A £3bn construction and services company is likely to be created after Balfour Beatty and Carillion revealed that they are in talks about a merger.
Carillion, one of Britain's biggest support services companies with annual revenues of more than £4bn, made an approach to Balfour Beatty, which has been under pressure since Andrew McNaughton departed as chief executive in early May after just a year in the job amid a profit warning.
The companies said after the stock market closed that both boards believe that a merger has the "potential to create a market-leading services, investments, and construction business of considerable depth and scale". However, the proposal will only go ahead if both boards recommended it to shareholders and no decision had yet been reached about the structure of such a deal.
The companies have until 21 August to announce either a firm intention to merge or state that no deal would take place.
Balfour has been hit by project delays and contract disputes at its British engineering services business, where it expected to post a £30m loss for 2014. That result will restrict annual profits to between £145m and £160m, compared with the £187m it made in 2013.
The company announced a strategic review in May and said it would put its US project management business Parsons Brinckerhoff up for sale. That process will not be affected by the merger talks.
The market capitalisation of Carillion is slightly lower than that of Balfour at £1.46bn, but its shares have risen modestly this year compared with a 19% slide for the construction company, whose projects include transforming the Olympic stadium in east London into a multi-use venue and widening the M25 motorway.
Richard Howson, the chief executive of Carillion, is expected to run the combined company if the deal goes ahead. Balfour is still searching for a replacement for McNaughton, who was pushed out after issuing his third profit warning.
Carillion employs more than 40,000 people in Britain, Canada, the Middle East and north Africa and provides services such as facilities management for the NHS, local authorities and the Ministry of Defence.
The company said on Thursday that it had won a £2.8bn contract, along with joint venture partner Amey, to manage and upgrade the entire MoD estate.
Stephen Rawlinson, an analyst at Whitman Howard, called the contract a "game changer" for Carillion, which was also responsible for building the Channel Tunnel Rail Link to St Pancras and will undertake the £75m redevelopment of Anfield stadium in Liverpool.
Balfour was founded in London by George Balfour and Andrew Beatty in 1909, while Wolverhampton-based Carillion traces its history back to the companies that became part of the Tarmac Group by the late 1990s, including Wimpey Construction. In 1999, Tarmac split into two as it created a separate company focused on support services and construction, which was Carillion. Since then it has bought companies including Mowlem and Alfred McAlpine.
Shares in Balfour Beatty closed at 232.1p, while Carillion ended at 338.7p before news of the merger emerged. A combined company could be eligible for inclusion in the FTSE 100.