With shares down from 200p to 57p in a month, City doubts future of builder whose projects include Anfield and Battersea
For many, the morning of 8 July promised a feast of sport: the British Lions Test in New Zealand, a Lord’s Test and Wimbledon. But a small group of bankers were about to have their weekend ruined by a summons to an emergency meeting in London’s Maddox Street.
Board papers had been delivered to the homes of the directors of Carillion, a FTSE 250 business best known as a builder that works on huge construction projects, and the documents contained disturbing news. A review of the group’s finances, commissioned two months earlier from accountants KPMG, had unearthed a gaping hole in the accounts.
Meetings through Saturday and Sunday produced an 800-word statement to the stock exchange, which shocked the City when it was released at 7am on Monday morning. It was a monster profit warning following an £845m writedown, of which £375m related to three large public private partnership (PPP) contracts in the UK and £470m to the cost of pulling out of several markets in the Middle East and Canada.
The announcement continued: chief executive Richard Howson had immediately stepped down, and a new interim boss, Keith Cochrane, had been parachuted in to conduct a “comprehensive review of the business” until a permanent successor was found. Predictably, the shares reacted violently to the news – slumping 39% on Monday – but the bloodbath didn’t stop there.
They were down again by 33% on Tuesday, plus another 27% on Wednesday, and suddenly a business with annual revenues of £5bn and 48,000 employees was worth less than £250m. The shares are now changing hands at just 57p – down from 200p a month ago and 350p two years ago. The City now expects the company will need to raise double that figure just to survive.
Sam Cullen, an analyst at investment bank Jefferies, said: “Realistically, we see no future for Carillion without a rights issue of at least £500m as we believe the group will find it increasingly difficult to win support services work with the balance sheet in its current state”.
What is Carillion – and how did this happen?
The company is an intrinsic part of the UK economy, being one of the major contractors to the Highways Agency and to Network Rail, and is essentially set up around three businesses. Firstly, it is perhaps best known for construction, where it has just completed the expansion of the main stand at Anfield and is working on the conversion of Battersea Power Station.
Secondly, there is a support services arm, which includes maintenance on buildings and cleaning services. And, thirdly, there is PPP, where it might fund and manage the building of a new NHS hospital.
PPP is one of those financial inventions that was sold as being a win-win for both sides. The government might get some new infrastructure more quickly and without having to to pay the huge upfront costs of building it, while the private companies financing the deal gained a valuable long-term income stream – often over 20 years or so. At least, that was the theory.
Just three Carillion PPP contracts – thought to be the Midland Metropolitan hospital in Smethwick, Merseyside’s Royal Liverpool hospital and an Aberdeen road project – are behind the bulk of the £375m losses that relate to the UK.
Industry watchers say that project delays – caused by such astonishing occurrences such as cold weather in Aberdeen over the winter – have introduced huge extra costs. Construction of the Royal Liverpool hospital has also been beset with hold-ups, most recently after after workers found “extensive” asbestos on site and cracks in the new building.
Meanwhile, just before the profit warning, it was revealed that another Carillion project – an experimental tram-train linking Sheffield and Rotherham – has cost more than five times the agreed budget and is running almost three years late. The government has been forced to compensate tram operator Stagecoach for the delays with a £2.5m payment.
These types of setback are frequent complaints of investors in the sector and is one of the reasons the City has long taken a dim view of Carillion. For months, the company has been one of the UK stock market’s most shorted companies – meaning that investors have been placing bets on a fall in the company’s share price.
The short-sellers have also been motivated by Carillion’s dependence on support services, which account for about 70% of operating profits and an area where companies regularly embarrass themselves with overly optimistic profit forecasts.
All of which means that City analysts are now speculating that the company could run out of cash – with those at Liberum wondering if it might breach a banking “facility”, effectively the company’s overdraft. Carillion also has a pension deficit of £587m to deal with.
The company has outlined a plan to avert all this, including accelerating a plan “to reduce net borrowing” and disposals to raise up to £125m in the next 12 months. By pulling out of construction in Qatar, Saudi Arabia and Egypt, it is withdrawing from its business in the Middle East almost entirely.
Further annual savings will be announced following a “strategic and operational review”, while the firm also plans to get better at collecting money that it is owed.
Will that be prove to be enough? Analysts at UBS say the company can potentially be recapitalised, but it is predicting more hefty share price falls in the short term. Its worst case scenario is particularly frightening: the Swiss bank reckons the shares could fall to zero.