By Mark Fairlie

In the weeks running up to the placing of outsourcing giant, Carillion, into administration, “investors were fleeing for the hills, and it appears those who looked closest ran fastest”.

This was the summary of Frank Field, the chairman of the Work and Pensions Committee at the House of Commons, in a damning verdict given on the 19th February 2018.

Carillion Plc

Carillion wore many hats as a business.

It was a major civil construction company involved in hospital building, the high-speed rail line HS2 project, and various road widening schemes at the point of collapse. It also provided facilities management services to 150,000 buildings in the UK, Canada, and the Middle East. It delivered services to businesses, schools, charities, local government, central government, the NHS and so on. Its main value to non-construction clients was that it acted as effective internal departments for its clients but it carried the burden of paying wages, managing staff, and mitigating project and financial risks.

It put itself into compulsory liquidation on 15th January 2018 after directors decided that there was not enough worth within the business to try to save it.

Investor timeline

As reported in EADT, Business Committee chair Rachel Reeves said that

“Investors spotted that Carillion was heading for disaster and fled. Carillion’s annual reports were worthless as a guide to the true financial health of the company. (Auditor) KMPG will have to explain why they signed-off on accounts which appeared to bear so little relation to reality.”

The crisis took 2-3 years to unfold but the “stewardship” of Carillion had been described as “best in class” by their auditors, KMPG.

In July 2017, Carillion issued a profits warning which caused a major dip in its share price. The profit warning was issued after the company had to cover financial losses of £845m to deal with problems with ongoing contracts.

This was following guidance from the Carillion board that the company had a “high-quality order book” and a “strong pipeline of contract opportunities.”

Kiltearn Partners, which owned 10% of the companies shares in Q1 2017, told PBC Today that the £845m write-down in the company’s contracts “effectively destroyed Carillion’s capital base” and that calculating a valuation of the company after that point became impossible because Carillion’s future cash flows became impossible to predict.

Carillion investors "fled for the hills"

According to Global Construction Review, Kiltearn Partners had considered brings legal action against Carillion because the board should have been aware of the upcoming need for a £845 provision. Legal action, which was not eventually brought forward, would have been launched with a view “to recovering client losses”.

Other investor concerns were noted at the Committee meeting.

Standard Life Aberdeen began divestment in December 2015 because of “concerns about financial management, strategy, and corporate governance”. Brewin Dolphin, another large investor, began reducing its stake in the company in 2017, accelerating the speed of their share selling after the profit warning was issued.

After four failed attempts to meet Carillion’s new chief financial officer, Zafar Khan, Canadian investor Letko Brosseau decided to sell their shareholding after a further profit warning in November 2017 and a breach of bank covenants.

Further Carillion fall-out

In the last few weeks, as a result of Carillion’s liquidation:

  • Insurers have paid out £30m to suppliers
  • More delays caused during the construction of two major hospitals
  • Redundancies have topped 1,000
  • A reorganisation of train services in Wales has been disrupted
  • Santander’s profits have been dented because of its exposure to the firm
  • Construction of 6 schools in Ireland are in doubt

Auditor quiz

Carillion’s auditing company, KPMG, will be interviewed by the select committee on Tuesday 20th February 2, 2018.