Carillion
Carillion plc was a British multinational construction and facilities management services company headquartered in Wolverhampton in the United Kingdom, prior to its liquidation in January 2018.
Carillion was created in July 1999, following a demerger from Tarmac. It grew through a series of acquisitions to become the second largest construction company in the United Kingdom, was listed on the London Stock Exchange, and in 2016 had some 43,000 employees. Concerns about Carillion's debt situation were raised in 2015, and after the company experienced financial difficulties in 2017, it went into compulsory liquidation on 15 January 2018, the most drastic procedure in UK insolvency law, with liabilities of almost £7 billion.
In the United Kingdom, the insolvency caused project shutdowns and delays in the UK and overseas, job losses, financial losses to clients, joint venture partners and lenders, to Carillion's 30,000 suppliers, and to 27,000 pensioners, and could cost UK taxpayers up to £180M. It also led to questions and multiple parliamentary inquiries about the conduct of the firm's directors, its auditors, the Financial Reporting Council and The Pensions Regulator, and about the UK Government's relationships with major suppliers working on private finance initiative schemes and other privatised outsourcing of public services. It also prompted legislation proposals to reform industry payment systems, consultations on new government procurement processes to promote good payment practices, and proposed FRC reforms to the treatment of directors' bonuses paid in shares.
The May 2018 report of a Parliamentary inquiry by the Business and the Work and Pensions Select Committees said Carillion's collapse was "a story of recklessness, hubris and greed, its business model was a relentless dash for cash", and accused its directors of misrepresenting the financial realities of the business. The report's recommendations included regulatory reforms and a possible break-up of the Big Four accounting firms. A separate report by the Public Administration and Constitutional Affairs Select Committee, in July 2018, blamed the UK government for outsourcing contracts based on lowest price, saying its use of contractors such as Carillion had caused public services to deteriorate.
History
Foundation
Carillion was created in July 1999, following a demerger from Tarmac, which had been founded in 1903. Tarmac focused on its core heavy building materials business, while Carillion included the former Tarmac Construction contracting business and the Tarmac Professional Services group of businesses. At the time of demerger Sir Neville Simms was appointed executive chairman of the business. Simms stood down from his executive responsibilities in January 2001 but remained non-executive chairman until May 2005 when Philip Rogerson took over the chair.The name 'Carillion', a corruption of the word 'carillon', was intended to give the construction business a clearly defined, separate identity, and to distance it from its construction roots. It was proposed by London branding consultancy Sampson Tyrell.
Acquisitions
Under CEO John McDonough, Carillion expanded into the facilities management services sector.In September 2001, Carillion acquired the 51% of GT Rail Maintenance it did not already own, thereby creating Carillion Rail. Carillion Rail carried out track renewals on the rail network, and contract work for Network Rail.
In August 2002, Carillion bought Citex Management Services for £11.5M and, in March 2005, it acquired Planned Maintenance Group for circa £40M. After that, Carillion went on to acquire two more United Kingdom support services firms: Mowlem, for circa £350M in February 2006, and Alfred McAlpine, for £572M in February 2008. Then, in October 2008, Carillion bought Vanbots Construction in Canada for £14.3M.
Carillion bought Eaga, an energy efficiency business, for £306M in April 2011. However, by December 2011 the UK Government had significantly reduced the feed-in tariffs for green energy and Carillion had to rationalise the business.
In December 2012, it acquired a 49% interest in The Bouchier Group, a company providing services in the Athabasca oil sands area, for £24m. Then, in October 2013, the company bought the facilities management business of John Laing.
In August 2014, the company spent several weeks attempting a merger with rival Balfour Beatty. Three offers were made; the last bid, which valued Balfour Beatty at £2.1 billion, was unanimously rejected by the Balfour Beatty board on 19 August 2014. Balfour refused to allow an extension of time for negotiations that could have prompted a fourth bid. Carillion announced later that day that it would no longer pursue a merger with its rival.
In December 2014, Carillion acquired a 60% stake in Rokstad Power Corporation, a Canadian transmission and distribution business, for £33M. Carillion acquired 100% of the Outland Group, a specialist supplier of camps and catering at remote locations in Canada, in May 2015 and a majority stake in Ask Real Estate, a Manchester-based developer, in January 2016.
Blacklisting involvement
In 2009, Carillion was revealed as a subscriber to an illegal construction industry blacklisting body, The Consulting Association, though its inclusion on the list was mainly due to its previous ownership of Crown House Engineering, and previous use of TCA by Mowlem. Carillion made two voluntary submissions to the House of Commons' Scottish Affairs Select Committee, one in September 2012, and another in March 2013, relating to its involvement with TCA.In July 2014, Carillion was one of eight businesses involved in the 2014 launch of the Construction Workers Compensation Scheme, though this was condemned as a "PR stunt" by the GMB union, and described by the Scottish Affairs Select Committee as "an act of bad faith". As one of the contributors to the scheme, Carillion reported in August 2016 "a non-recurring operating charge of £10.5M" representing the compensation and associated costs it expected to pay. In December 2017, Unite announced that it had issued High Court proceedings against 12 major contractors including Carillion.
Financial difficulties
Concerns about Carillion's debt situation were voiced in March 2015 by UBS analyst Gregor Kuglitsch who highlighted the company's extended supplier payment terms and its use of 'reverse factoring', argued Carillion was more leveraged than it reported, and predicted a "profit shortfall" was likely. By October 2015, Carillion had become hedge funds' most popular share to 'sell short' as analysts questioned the lack of growth and rising debt. From having less than 5% of its shares shorted at the beginning of 2015, over 20% of Carillion shares were on loan to hedge funds by June 2016; the company's share price fell 19% over the same period.On 10 July 2017, a Carillion trading update highlighted a £845M impairment charge in its construction services division, mainly relating to three loss-making UK PFI projects and costs arising from Middle East projects. Chief executive Richard Howson stepped down but was retained as operations director, with Keith Cochrane temporarily becoming CEO.
As a result, the contractor was demoted from the FTSE 250 Index, and five directors left the company as it tried to refinance. On 27 September 2017, a Middle Eastern firm was said to be considering a takeover bid. Two days later, it was revealed that Carillion's losses for the six months ended 30 June 2017 totalled £1.15 billion, following a further write down of £200M relating to its support services division.
In September 2017 Keith Cochrane told investors that the business had accepted too many projects which turned out unprofitable and for which the amount paid was insufficient for the cost of work done, and its management structure and internal organisation had been over-complex and lacking sufficient regard to contractual risk assessment and overly optimistic assumptions; as a result, the company had "burned through cash" trying to deliver to a high standard without assessing the possible implications. In September 2019, the Investors Chronicle commented that its financial problems were not a secret and had been known for at least two years, with little working capital, shrinking amounts due to customers, and rising monies withheld by clients.
On 24 October 2017, it was reported that Carillion was preparing to sell its healthcare facilities management business to Serco, and was planning to dispose of its Canadian operations to help shore up its finances. A week later, it was announced Carillion was selling its interest in developer Ask Real Estate to West Midlands developers Richardsons Developments for £14M. In December 2017, the Richardsons also acquired Carillion's interest in the Milburngate development in Durham.
In a further profit warning, on 17 November 2017, Carillion said it would breach banking covenants the following month, with full year debts set to reach up to £925M. A recapitalisation plan was to be implemented in early 2018. The company's share price fell over 50% in early trading to just 18p – valuing the business at £73M. Unite the Union sought urgent talks with the company, concerned about the future of around 1,000 Carillion workers plus others employed by subcontractors and agencies. Major shareholder Kiltearn Partners halved its shareholding incurring a loss of over £40M. On 20 December, Carillion announced it had brought forward the arrival of new CEO Andrew Davies to 22 January 2018.
On 3 January 2018, it was reported that the UK Financial Conduct Authority was to investigate the timeliness and content of Carillion announcements from December 2016 regarding its financial situation. Ten days later, the BBC reported that the company had "a matter of days" to avoid collapse and that Carillion was the subject of "high level government meetings".
These meetings continued throughout the weekend of 13–14 January – covering the company's £900M debts, a £580M pension deficit, and many ongoing contracts for government departments – but broke up without a rescue deal agreed, with a potential administration process set to start on 15 January 2018. The Financial Times later reported Carillion had just £29M in cash when it collapsed, and would have run out of cash by 18 January 2018. Consultants PricewaterhouseCoopers and EY had both rejected roles as administrators amid concerns they would not be paid.