Carillion is a hugely important company for the UK economy.
It is one of the top two contractors both to the Highways Agency and to Network Rail, as well as being the largest provider of broadband installation services to the telecoms sector.
It is also one of the biggest suppliers of facilities management services for properties owned by the Government and employs almost 20,000 people in this country out of a total global workforce of nearly 50,000.
With operations spanning Canada and the Middle East, it is also a major exporter earner for the UK, a key player in Britain’s push to win international trade.
:: Carillion shares plunge amid profit alert
So the woes to have afflicted it are therefore troubling.
The City has long had a downer on Carillion. It has for months been one of the UK stock market’s “most-shorted” companies – in other words, investors have been selling shares in Carillion they do not own already, in anticipation of a drop in the shares.
Those investors will be sitting on big profits after today’s 35% share price collapse.
Why was there so much scepticism? Largely because Carillion operates in a sector, support services, where companies have been shown time and again to be too optimistic about the profitability of the work they do.
Because the contracts are long term, the costs associated with them and the revenues they are likely to generate are often no more than estimates, making them prone to revisions.
That certainly appears to have been an issue here: the astonishing £845m provision unveiled today includes some £599m worth of income Carillion expected to receive that it is now unlikely to.
Yet there also appear to have been problems specific to Carillion.
Keith Cochrane, named on Monday as the interim chief executive, summed these up: “Tenders have been accepted with a high degree of uncertainty about key assumptions; our ultimate success has been contingent on the performance of others not under our control and we’ve agreed design changes without agreeing incremental cost and value.”
In other words, Carillion has not been well run, which is probably why the former chief executive, Richard Howson, has been shown the door, along with the former managing director of Carillion’s UK building business.
Where does it go from here? Well, Mr Cochrane has launched a strategic review, which he expects to complete by September.
The long term priority is clear – to simplify the company, which also has a pension deficit of £1.4bn, while bringing down borrowings.
Zafar Khan, the newish chief financial officer, said Carillion expects net debt to rise to between £775-£800m by the end of the financial year, although that does not include any money it may raise from disposals.
There will also be an attempt to claw back something, anything, from the four contracts at the heart of Monday’s profits warning. That may explain Mr Cochrane’s reluctance to go into detail on which contracts have gone wrong.
But the magnitude of the share price fall suggests Carillion will have to tap shareholders for cash.
One sure sign of that was how Mr Cochrane was today stressing the company’s strengths.
These include £12.8bn worth of support services contracts, the average life of which is nine years and with no contract renewals due until 2019, with much of that work for the public sector.
Mr Cochrane also highlighted how Carillion had won £2.6bn worth of new work so far this year, including £555m with the Ministry of Defence, for which it is a major contractor in defence infrastructure.
However, asked whether a cash call was likely, Mr Cochrane was coy: “I’ve not spoken to any shareholders. I was appointed yesterday and believe it or not, there aren’t many shareholders around on Sunday, particularly when there’s a cricket match on.
“But no option is off the table.”
That probably means investors should ready themselves to get out the cheque book.
Source: SKY News