Speak to us, Costain urges Mouchel board

Mouchel, whose operations range from highway maintenance to consulting for local authorities, has been hit hard by Government cutbacks and embarked on a strategic review after saying it may need fresh funds if it fails to reach a refinancing deal with its banks.

Costain said there was a "compelling strategic rationale" behind a combined group which would have premium brands in consulting, construction and care, and an order book of more than 4bn.

Costain said it planned to talk to Mouchel shareholders directly after Mouchel's board rejected the all-share approach, made on December 2, and declined the opportunity for talks. Mouchel said the offer significantly undervalued the business.

"We approached them earlier in the month with a desire to speak to their management team. That opportunity was rejected and there hasn't been any discussions since," said Costain's chief executive Andrew Wyllie.

"The door is open and remains open. As a result of going public, we would hope to talk to their shareholders and we'll see how it develops from there."

Mr Wyllie declined to comment on whether Costain would consider upping the bid or changing the terms of the offer to include a cash element.

Costain said its offer, which had the strong support of its key lending banks, comprised 0.5135 new Costain shares for each Mouchel share, valuing Mouchel shares at 104.75p at current share prices.

Brewin Dolphin analyst Mark Fleetwood said Mouchel's depressed share price made it attractive for a number of bidders, particularly given longer term opportunities in local authority outsourcing.

"We would not be surprised if this prompted further, higher bids (from either Costain or others) in the near future," he said.

In a research note, analysts at JP Morgan said any bid would need to reflect the likely upswing potential in the group's earnings from 2012 onwards and said even a 175p offer would not fully reflect the potential recovery in the business.

KBC Peel Hunt analyst Christopher Bamberry said a potential acquirer could pay up to 156p to generate a 10 per cent return on investment capital.