One of the UK government’s biggest contractors and an employer of 50,000 people worldwide, Carillion is fighting for survival after a calamitous fall in its share price wiped nearly three-quarters off the company’s value in three days.
A damaging profit warning, revelations of a sharp increase in debt and larger than expected writedowns on four projects this week confirmed what many short sellers in the market had bet on for years — that Carillion’s finances were far shakier than appeared.
Carillion is the biggest manager of military bases for Britain’s Ministry of Defence and its other activities range from maintaining tracks for Network Rail and building roads for the Highways Agency, to hospitals in Canada and Oman’s parliament.
Fears are now growing that the shockwaves triggered by this week’s announcement will spread to thousands of sub-contractors used by the group.
On Thursday, Oxfordshire County Council said it would end in September a 10-year deal with Carillion to build schools and supply property management services, which had been signed in 2012 and was due to run until 2022 and be worth £500m.
Bankers at Lazard are scrambling to find a solution after Carillion on Monday announced a “corporate and strategic review” — and its share price has plunged by 70 per cent to 59p since, although it recovered 3 per cent on Thursday.
Already the group has written off £845m of operating profit from construction contracts, replaced its chief executive, Richard Howson, and suspended its dividend.
Its more dramatic options to stave off bankruptcy include a rescue takeover, a debt-for-equity swap or a heavily dilutive equity raising from shareholders.
The debacle puts thousands of the company’s contractors and subcontractors at risk and highlights the frailty of UK construction companies, which have almost no assets and outsource nearly all of their work. The sector is vulnerable to slow payment practices — for years Carillion has had a reputation for late payments to suppliers.
Questions are also being asked by analysts over accounting practices in the industry, including how early companies record profits on long-term contracts, which can affect how much they can borrow.
“Everyone will be watching the Carillion process with a lot of anxiety,” said Rudi Klein, chief executive of the Specialist Engineers Contracting Group. “There’s thousands of contractors and sub-contractors tied up in the company and the way things are going they will be incredibly concerned. Now the subcontractors are wondering if they will get paid in three months and if they are paid late they may suspend work.”
Mr Klein added that Carillion’s woes “will raise questions on how the industry is built on balance sheets that don’t have any foundations; they don’t have any assets”.
Carillion has been shifting from construction to less risky support services contracts, such as facilities management, which now accounts for almost two-thirds of revenues. Almost all of the losses have come from its building arm, which was hit by a squeeze on contracts and margins after the financial crisis.
The company has faced delays to payments on public-private partnership contracts in the UK — an area it is withdrawing from — as well as rising materials and labour costs. It has also suffered, along with industry rivals, from a slowdown in signing contracts since the Brexit vote.
This week Carillion highlighted some key projects — including Merseyside’s Royal Liverpool Hospital and an Aberdeen road project — on which it has taken large writedowns. This sparked concerns that the company’s problems could run deeper, with profits potentially set for a sharp decline.
The company announced savings from axing its £80m dividend and withdrawing from business in Qatar, Saudi Arabia and Egypt. But these are unlikely to make a significant dent in its debt mountain — its net debt has risen from £42m in 2010 to £695m in the first half of 2017 and is expected to reach £800m in the second half.
Carillion’s market value on Thursday morning was about £250m, dwarfed by its £663m pension deficit, meaning any rescue deal would need to be negotiated with trustees.
Some analysts are forecasting a diluted rights issue of about £500m — double the company’s current stock market value.
“The most likely course of action will be a rights issue, but we would not rule out a more dramatic restructuring (an exit from construction?), or potentially a combination of both,” analysts at RBC Capital Markets said in a note.
But Stephen Rawlinson, analyst at Applied Value, said he viewed a rights issue as “extremely unlikely”.
“Why would any investor put money into Carillion when the trustees would have first call on it? There needs to be an agreement with pension trustees and they don’t tend to act quickly.”
Sources close to the company said that an emergency rights issue would take time to engineer given the instability in the share price and the churn in the share register. The company is exploring a range of other options, including a debt-for-equity swap, the source said.
The option of a purchase of part or all of the business has been downplayed, as rival British contractors including Balfour Beatty — the subject of an aggressive takeover attempt by Carillion in 2013 — appeared to rule out bids.
However, industry watchers speculated that a Chinese company could make a play for the group given Beijing’s ambitions to move into the British construction market.
“I can’t see any British firm bidding for it,” said one industry source. “Why would you invest? How many businesses do you know that have only had [just] one profit warning? They have hardly any assets they could sell and the pension trustees would have first access to the proceeds anyway.”
Carillion insisted it had substantial liquidity and was in no danger of breaching banking covenants, which do not mature before 2019 and 2020. It said that with £4.8bn new orders last year and £2.6bn so far this year it was still winning work and going about its business as usual.
But there are concerns that the situation could quickly deteriorate, particularly if the group started struggling to pay suppliers.
“If you’re a contractor working for Carillion you’ll be worried about progress payments over next three months because they may slow down payment to the supply chain by even more than 120 days,” said Mr Klein, who added that he was advising subcontractors to assess the risks and chase outstanding payments.
Mr Rawlinson did, however, point to rivals of Carillion that have survived similar problems.
“The sector has been prone to over optimistic views of costs and revenues for a long time,” he said. But although some such as Jarvis, the rail contractor, have gone into administration, others such as Serco, Mouchel and Balfour Beatty have faced spectacular blow-ups and survived.