Friday, 17 November 2017

Carillion in Crisis

Today’s second post looks at the ever-developing story that the British-based multinational construction firm Carillion has today issued its third profit-warning since July, in addition to its suggestion that it is about to breach conditions attached to loans that it is accountable for. With the increasing utilisation of so-called ‘Public Private Partnerships’ and ‘Public Finance Initiatives’, as discussed in a recent post here in Financial Regulation Matters, it is worth discussing the potential effect that this financial bombshell will have; will it cause the socially-integrated company to begin to spiral and ultimately fail, or will it be the latest demonstration of a company that is ‘too big to fail’, as one onlooker has suggested today.

Carillion is proving to be synonymous with this particular period of Britain’s economic history, with the firm winning a number of lucrative and highly-visible contracts, including skyscrapers in Manchester, and of course the infamous HS2 high speed rail project as part of an overall £6.6 billion contract (to all of those involved, not just Carillion); the company is also responsible for the Royal Opera House in Oman, the Yas Viceroy hotel in Abu Dhabi, the redevelopment of the Tate Modern building, GCHQ, Brampton Civic Hospital in Canada and the Library of Birmingham, amongst other projects. However, despite these contractual successes, all is not rosy at Carillion’s headquarters, with many stating that a number of high-risk projects have resulted in the recent malaise for the company. In the Summer, the time of its last profit warning, it was identified that four projects in particular, in conjunction with the need to divest from Canada and the Middle-East, were causing the company serious problems; the company is feeling the effects of loss-making contracts, late-paying contracts, and a building sector that is being squeezed by the economic environment. Three projects in the U.K. – The Royal Liverpool Hospital, the Midland Metropolitan Hospital, and a road project in Aberdeen – are understood to have heavily contributed to the recent £375 million write-down that is at the heart of the spiralling financial health of the company.

For a company that survives upon large-scale grandiose plans, usually by states demonstrating their financial health, the inherent uncertainty that defines the post-2016 (and realistically the post-Crisis) world can be a deathblow if the company is not diversified enough to protect itself – it is for this reason that the company has been divesting from its Canadian and Middle-Eastern projects, whilst also moving the bulk of its business into the facilities management business which, according to the Financial Times now represents almost two-thirds of its entire revenue stream. Yet, the drop in share price, particularly when viewed in relation to its share price when it buoyantly attempted to takeover one of its main rivals Belfour Beatty, means that the company has witnessed its share price fall from 340p in 2014 to 117p today. Ironically, the predicament the company finds itself in has led to speculation, which is being fuelled by a merciless short-selling campaign, that the company itself is now particularly vulnerable to a takeover. However, whilst these facts, figures, and opinions all point to a company in freefall, the reality may be much different.

A piece in today’s Independent discusses how, four year ago, the National Audit Office declared Carillion ‘too big to fail’ because, in effect, it had been allowed to attach itself to the very infrastructure that underpins British society – hospitals, transport, schools, and the military were all reliant upon Carillion to offer their services, for a price. Furthermore, the company is being woven into society even further despite its poor performance, with the contract for its involvement in the HS2 project being awarded just days after one of its most troublesome profit warnings earlier this year. The article in question asks whether knowledge of this arrangement affects the decision making in the firm, and in reality that is a question that need not be answered – knowledge that you are too big to fail has to have an impact upon decision making, whether knowingly or otherwise. Yet, the problem is representative of a much larger social issue, and that is political short-termism.

HS2 was George Osborne’s signature contribution to society, but he left shortly after championing it. Theresa May, now at the helm, is being bombarded with a number of crucial problems like the ever-stuttering Brexit negotiations; has she the capacity to tackle this growing systemic problem of PPP-providers being on the brink of failure? Quite frankly, the obvious answer is ‘no’, with the consequence of that being that to kick this problem further up the road when she will have left Office quickly becomes the best possible option. Companies like Carillion, that are interwoven within society, rely upon this political short-termism to survive and prosper, because for Carillion to fail now would be a problem the country simply cannot afford. So, yes, knowing that one is ‘too big to fail’ has an effect, and it has an effect of everyone.

Keywords – Construction, Carillion, Brexit, Business, Politics, Finance, @finregmatters.

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