Brexit Dreamers Get Smacked in the Face by Reality

Carillion tumble shows struggles for U.K. contractors trying to deliver "Global Britain."

Brexit's fans in the (just about) ruling Conservative Party like to talk about their hopes for a "Global Britain" after the country quits the EU. In this happy land, lucrative trade deals will be struck abroad -- benefiting the nation's industries -- while the government opens the spending tap and splashes out on domestic infrastructure.

Unfortunately for the companies that might have looked to exploit this once-in-a-lifetime opportunity, what we have instead is a prolonged period of political stasis and the knock-on impact that will have on big projects and spending plans. For many in the support services and outsourcing industry, it comes at an already difficult moment. 

Take Carillion Plc, the construction specialist, which lost some 265 million pounds ($342 million) of its market value on Monday after it warned of disappointing profits and parted ways with its CEO. The company, which works in the U.K., the Middle East and Canada, has promised to exit businesses, cut its ballooning debt and is suspending its dividend. Given the large short positions in its stock, this won't have surprised some investors.

Hooks In You

Carillion's share price tanks after warning of deteriorating business and suspending dividends

Source: Bloomberg

Intraday times are displayed in ET.

It's not the first time a British contractor has spooked the market. Rival outsourcing firms Capita Plc and Mitie Group Plc have issued profit warnings in the past year too, as the Brexit vote slows the pace of new contracts and the business investment outlook darkens. The June general election, which left Theresa May severely weakened, has made things worse. Construction output was falling before then.


U.K. outsourcing firms have underperformed since the Brexit vote

That's not to say Brexit and politics offer an excuse. Carillion's woes are what its managers call "a perfect storm": four unidentified contracts going wrong at the same time in recent months, leading to "significant" cash outflows and exposing the rise in debt. A U.K. tramway project has been flagged by Britain's National Audit Office for ballooning costs and delays.

The debt problem has been worsening. Net debt to equity at Carillion has risen sharply over the past two years, according to Bloomberg data.

Something's Got to Give

Net debt to equity has risen sharply at Carillion in recent years

Source: Bloomberg

The company's pullback in certain markets will probably lead to a diminished company, certainly not one ready to lead the global charge hoped for by Brexiteers like Liam Fox. Carillion is selling assets and exiting countries in the Middle East, where falling crude prices and an effective blockade of Qatar have damped prospects. The company is cutting its U.K. construction business too. A share sale to raise cash might be on the cards, reckons Numis analyst Howard Seymour.

This would all be troubling enough without the Brexit background. Carillion's share price contagion spread to rivals with stronger finances on Monday, such as Balfour Beatty Plc. Many in the sector are selling assets and bringing in more finance-focused managers. Building the much-ballyhooed "Global Britain" may have to wait.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at llaurent2@bloomberg.net

    To contact the editor responsible for this story:
    James Boxell at jboxell@bloomberg.net

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