A clock counting down to the opening of the £335m Royal Liverpool Hospital was quietly removed from the site in March. The hospital will now open at least a year late after the construction company Carillion admitted a string of difficulties with the project — including cracked beams and asbestos.
It is just one of a slew of contracts that have harmed Carillion. Last Monday the FTSE 250 company revealed that problem jobs in the UK, the Middle East and Canada would cost it £845m in writedowns.
Carillion’s week
Though some in the City had long expected the profit warning, Carillion’s share price crashed almost 40% on the day and ended the week 71% down at 56.2p, valuing the company at £242m.
It also lost chief executive Richard Howson. Keith Cochrane, formerly head of Weir, is the stand-in boss.
Bankers from Lazard have been drafted in to review “strategic options”, which range from a sale or break-up to a debt-for-equity swap.
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Short-sellers, which bet on falls in a company’s share price, profited heavily from the collapse. For two years they have made Carillion the most shorted stock on the London market — and have not yet closed their positions as they scent further falls.
Like many of its rivals, Carillion has relied on contracts that pay out over several years — and incur huge penalties when they go wrong. Balfour Beatty, Mitie, Capita and Connaught have also come unstuck.
Wolverhampton-based Carillion is, belatedly, baling out of public-private projects. “The company has defied gravity for five to six years,” said Stephen Rawlinson of the analyst Applied Value. “It should have had a profit warning five years ago after it bought Eaga.”
Carillion was formed in 1999 when it split from the Tarmac group. Howson took the reins in 2012 after 16 years with the company and its predecessor. A month before he started the top job, Carillion spent £298m on the energy services business Eaga. The deal proved disastrous when subsidies for solar panels were slashed shortly after it was bought.
Before long the company was back on the acquisition trail with an unsuccessful bid for much bigger rival Balfour Beatty in 2014. At the time, some questioned whether the bid was a smokescreen for Carillion’s problems.
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Analysts have increasingly raised doubts about the company’s accounting and growing debt pile. The annual results for 2016 showed net debt at £219m. The same document, however, put average debt during the year at more than double that figure — £587m.
Last week’s trading update showed average debt climbed to £695m in the first six months of this year. However, the company insists there is no danger of it breaching the terms of its loans,.
Analysts have highlighted an unusual arrangement with suppliers — reverse factoring — which involves Carillion using bank finance to pay its bills early. At the end of last year this “early payment facility” with lenders including RBS, Lloyds and Santander totalled £498m.
Then there is the £587m deficit in its pension scheme, which has obligations of £3.4bn. The company is negotiating new terms with the trustees, likely to raise its annual contribution from about £47m a year.
Rawlinson reckons this would make a rights issue futile, as the trustees would demand any equity raised to plug the pension gap. Yet the trustees know they cannot risk starving Carillion of cash. The survival of a company that employs almost 50,000 people and has worked on celebrated schemes such as Tate Modern and Heathrow Terminal 5 is now at stake.
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There is a growing belief that the banks, including HSBC and RBS, will take control and the retirement scheme will move into the Pension Protection Fund.
A sale might be the cleanest solution for Carillion, but would any of its rivals take the risk? Some of its domestic peers, including Balfour Beatty, are still working through their own problems, while it would be a huge stretch for the likes of Kier and Costain.
That leaves overseas predators, such as Chinese, American or Australian bidders. “It would be a good way to break into the British market,” said one industry expert. “But you would have to be pretty brave.”