Photographer: Simon Dawson/Bloomberg

One British Company Saw 70% of Its Value Vanish This Week

  • Options include equity issue, debt swap and asset sales
  • Balance sheet concerns trump strategy, says Cenkos analyst

In 2014, U.K. builder Carillion Plc was riding high: it had just won a $434 million contract to build the Royal Liverpool Hospital and was attempting to snap up its struggling rival Balfour Beatty Plc for about $2.6 billion. Three years later, and the former Tarmac business is on life support.

Carillion has lost 70 percent of its market value this week after flagging 845 million pounds ($1.09 billion) in surprise contract provisions. In an emergency move, it installed non-executive director Keith Cochrane as interim chief executive, and called in KPMG to help review its books and balance sheet, described by Liberum analyst Joe Brent as “a mess.”

The Wolverhampton-based construction company announced on Friday it has added HSBC to its ranks of financial advisers, working alongside Morgan Stanley, Lazard and Stifel to draw up a rescue plan. Although the ex-CEO of Scottish engineering firm Weir Group Plc has already said he’s considering “all options” for Carillion, analysts are struggling to see them and the specter of Brexit is an unwelcome backdrop as the pace of new work slows.

“They’ve either got to find something that they can sell for 400 million pounds, or I think they’ve got to raise equity, there’s no middle ground now,” Cenkos Securities analyst Kevin Cammack said in an interview. “It’s hard to see that they have a single business that could quickly raise that sort of money.”

Graveyard

Britain’s construction industry is littered with Carillion-esque meltdowns. In 1995, Costain Group Plc also had a spectacular fall from grace after helping build the Channel Tunnel. Battered by poor real-estate investments, it skirted with insolvency. Yet Costain was able to spin off a more valuable set of assets than Carillion owns, Cammack said. A decade later, it was the turn of Mowlem Plc to uncover accounting problems that plunged the business into loss. Carillion bought that business in 2006.

“It was extremely painful but Costain did actually have some businesses that could crystallize that true asset worth into real money,” said Cammack. “The problem that Carillion has is a paucity of any true tangible assets.”

While investors have become more accustomed to massive sell-offs at even much bigger companies this year -- think BT Group Plc, Pearson Plc and Cobham Plc -- nothing in recent corporate memory is on the scale of Carillion. It initially struggled to halt its descent, but after days of declining, Carillion stock rose as much as 12 percent today.

Marshall Wace LLP, BlackRock Investment Management and Naya Capital Management are among at least 19 money managers that bet against Carillion shares, the most for any British company, according to data based on disclosures with the U.K.’s market regulator.

Carillion hopes to raise 125 million pounds from exiting some businesses and markets over the next 12 months. It suspended dividend payments to save another 80 million pounds. More drastic action may be needed. At this stage, the future of Carillion will be governed by how effectively Cochrane can restore the balance sheet, rather than choosing which bits of the business he wants to keep, Cammack said. Its contracts include the expansion of Liverpool FC’s Anfield stadium.

None of the measures announced so far “are anything like sufficient” given debt levels of 900 million pounds in the second half, Liberum’s Brent said. The Royal Liverpool Hospital contract, along with a Sheffield tram and Aberdeen relief road contract are all projects that have dragged Carillion down, he said.

“No news now is probably bad news later,” Brent said in a note.

Despite having had 580 million pounds initially lopped off its market value in the rout, UBS analysts see the potential for more heavy weather ahead. Construction can also be a volatile market, especially in the current economic environment. Oxfordshire’s council announced Thursday it will cancel a 10-year contract with Carillion to build schools and supply property services worth 500 million pounds and due to run until 2022.

A U.K health trust partnered with Carillion on the 335 million-pound Liverpool hospital development sought assurances, and was told by the company that the "current financial situation will have no impact,” according to the Royal Liverpool and Broadgreen University Hospitals NHS Trust in an online statement published Friday. The U.K. government’s export credit agency restated its commitment to the company, which it had supported in winning contracts in the United Arab Emirates.

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