Babcock said it received an “unsolicited and highly preliminary proposal” from Serco for a potential all-share combination of the two companies.
“The board of Babcock, together with its advisers, carefully considered the proposal and unanimously rejected it, having concluded that a combination of the two companies had no strategic merit and was not in the best interests of Babcock's shareholders, customers or wider stakeholders,” the company said.
It is the second time in the past year that Serco has approached Babcock over a potential £4bn deal.
Serco’s interest in Babcock comes amid a difficult time for outsourcers with Carillion collapsing last January, Interserve entering administration in March and Capita undergoing a major overhaul after a series of profit warnings.
Last year Serco made pre-tax profit of £74mln, up from £10mln in 2017, on turnover down 4% to £2.8bn and said it expects the coming year to be “challenging”.
In comparison, Babcock posted a 39% drop in pre-tax profit to £235mln and a 4% decline in revenue to £4.5bn, adding that it predicts both measures to sink in the year ago.
Serco’s shares have recovered slightly since December to rise 40% over the past six months to 136p on Friday but are still well below a 2013 peak of 364p before the company came close to entering bankruptcy a year later.
Babcock’s shares slumped to 464p at the close of last week from a peak of almost 1,300p in 2014.
In morning trading, Babcock shares rose 3.5% to 480p while Serco shares were little changed.