Carillion Collapses After U.K. Government Refuses Bailout
(Bloomberg) -- Carillion Plc, a U.K. construction company with government contracts in everything from hospitals to the HS2 high-speed rail project, filed for compulsory liquidation after failing in a last-ditch effort to shore up finances and get a government bailout.
The company employs 43,000 people worldwide, almost 20,000 of them in the U.K., and has as much as 1.5 billion pounds ($2.1 billion) in outstanding borrowings. It held talks with the government Sunday to ask for the 300 million pounds it needed by the end of the month to stay afloat, the Mail on Sunday reported.
Carillion’s board “concluded that it had no choice but to take steps to enter into compulsory liquidation with immediate effect,” the company said in a statement Monday. It’s obtained court approval for the move, Carillion said.
The challenge for liquidators and Prime Minister Theresa May’s government now will be to ensure that the company’s breakup is orderly, with contracts and staff moved to rivals. While Carillion’s spectacular fall has been gathering pace since July after a series of construction contracts soured, the political fallout gained momentum on Monday.
The plan to wind up the company triggered criticism from the opposition, with Labour Party leader Jeremy Corbyn questioning the longstanding British policy of getting private-sector contractors to deliver public-sector projects.
“This is very worrying for a lot of groups,” Labour’s business spokeswoman, Rebecca Long-Bailey, told the BBC. “We expect the government to step up now and take these contracts back into government control. Where it’s possible to take those back in-house, it should do.”
She also questioned why the company had been awarded further government contracts despite issuing profit warnings.
David Lidington, the U.K. Cabinet Office minister, defended the government’s handling of the company. “We did decide that taxpayers cannot be expected to bail out a private business,” he told the BBC, adding that the deals that had got Carillion into trouble were overseas ones.
Lidington said that recent U.K. government services contracts had been structured in such a way that Carillion’s partners would now have to step in. For the rest, he said that “some services will be taken in-house, some services will go out to other contractors in a managed, orderly fashion.”
“This is a very sad day for Carillion, for our colleagues, suppliers and customers,” Chairman Philip Green said in the statement. The Wolverhampton, central England-based company said it expected the receiver to request that PricewaterhouseCoopers LLP be appointed special managers.
Carillion’s struggles posed a conundrum for May over the political cost of using public money to assist a private company, or allowing it to fail, putting public services and infrastructure projects nationwide in danger. The company has contracts with many wings of government, including building roads, managing housing for the armed services, and running facilities for schools and hospitals.
Carillion last year issued three profit warnings in six months, causing its shares to plummet 93 percent since July 7, giving the company a market value of 61.1 million pounds. While its stock was suspended on Monday, shares in construction equipment-rental firm Speedy Hire Plc became its first victim, falling as much as 12 percent due to its reliance on Carillion.
Carillion brought in Keith Cochrane as chief executive in July. The highly regarded 52-year-old chartered accountant was instrumental in building Scottish engineer Weir Group Plc into a global business, gaining the company a place in the U.K.’s benchmark FTSE100 index. Two months into his role at Carillion, he was already warning investors that “there is no such thing as a quick fix.”
In a harsh assessment of the U.K. builder on Sept. 29, Cochrane told analysts the company succumbed to its land-grab in contracting, racing to add projects with too many layers of management causing it to lose sight of the risks and costs involved. In some cases, the company was “building a Rolls-Royce, but only getting paid to build a Mini,” he added on the call.
Four contracts stood out in the 850 million-pound writedown Carillion booked, including a property development in Doha, two hospital contracts in the U.K., and a road-bypass around Aberdeen. Costs overran on the work, and in some cases Carillion was ill-placed geographically to be the contractor, increasing its expenses.
Government bailouts of private companies are rare in Britain; the most notable in recent years took place in 2008 and 2009, when then Prime Minister Gordon Brown bailed out the country’s banks, leaving the government holding stakes in Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc.
Carillion had borrowings of as much as 1.5 billion pounds as of June 2017, including an 835 million-pound syndicated bank loan, 350 million pounds of private notes, 170 million pounds of convertible securities and 111 million pounds of Schuldschein borrowings, a type of German promissory note, according to statements. Its net borrowing was 571 million pounds, nearly double the same time the previous year.
Much of its debt is held by banks, including a credit line syndicated among lenders including Royal Bank of Scotland, Barclays Bank Plc and Lloyds, data compiled by Bloomberg show. Lloyds and RBS recorded a rise in bad loans because of their exposure to Carillion, a person familiar with the matter said in November.
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