Carillion crisis: UK government locked in last-ditch rescue talks

Negotiations to stave off collapse of firm which employs 43,000 people hinge on creditors swapping debt for shares plus a state bailout

the Carillion logo adorns the orange bib of a London Overground construction worker




Carillion derives £1.7bn per year on revenue from public private partnerships, such as the London Overground extension at Dalston, east London.
Photograph: Cate Gillon/Getty Images

Carillion crisis: UK government locked in last-ditch rescue talks

Negotiations to stave off collapse of firm which employs 43,000 people hinge on creditors swapping debt for shares plus a state bailout

The government is holding talks with the construction and outsourcing firm Carillion, in a last-ditch attempt to stave off the collapse of a company responsible for crucial services in schools, hospitals and prisons.

With the accountancy firm EY lined up to manage an administration that could be triggered as soon as Monday, a rescue deal is expected to hinge on whether the government is willing to help prop up the company.

Profile

The Carillion CV

The Carillion CV

History – The business was built from the construction division of Tarmac. It was spun out of the Tarmac corporation in 1999 and then acquired rivals, including Mowlem and Alfred McAlpine. It also acquired a number of Canadian businesses.

Base – Wolverhampton

Employs – 43,000 staff (20,000 in the UK)

How the problems emerged – A profit warning on 10 July revealed an £845m impairment charge in the construction division. Months later shares were down more than 70%. There were further profits warnings in September and November.

Major projects – Involved in the construction of numerous high-profile projects, including the GCHQ ; the Beetham Tower in Manchester; London Olympics Media Centre; Rolls Building courts complex in London; Heathrow Terminal 5; Library of Birmingham; Liverpool FC’s Anfield stadium expansion; the Battersea Power Station redevelopment; and work on HS2.

Government contracts – School meals and cleaning at nearly 900 schools, maintenance contracts at half of the UK’s prisons, managing 200 operating theatres and traffic monitoring systems for the Highways Agency.


Photograph: PA
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Carillion, which is based in Wolverhampton, in the Midlands, and employs 43,000 staff, said it was still hopeful it could map out a future, involving its bank lenders swapping chunks of its £900m debt for shares. That plan would probably wipe out all existing shareholders.

But the banks, headed by HSBC, Barclays and Santander, have yet to agree on a restructuring plan and are understood to be reluctant to pour in new funding unless Downing Street takes part in a bailout.

The Cabinet Office is coordinating discussions expected to involve representatives from Carillion, accountants EY and multiple government departments, several of which employ Carillion to provide vital services.

The company derives £1.7bn – about a third of its revenue – from public sector contracts and public private partnerships. These include providing school dinners, cleaning and catering at NHS hospitals, construction work on rail projects such as HS2 and maintaining 50,000 army base homes for the Ministry of Defence.

Carillion is understood to be keen for the government to provide guarantees on some of its public sector contracts to give lenders the confidence to keep backing the company.

Q&A

What government contracts does Carillion hold?

NHS
•Manages facilities including 200 operating theatres and 11,800 beds
•Makes more than 18,500 patient meals per day
•Helpdesks manage 1.5m calls per year
•Engineering teams carry out maintenance work

Transport
•Building ‘smart motorways’ – which ease congestion by monitoring traffic and adjusting lanes or speed limits – for the Highways Agency
•Major contractor on £56bn HS2 high-speed rail project
•Upgrades track and power lines for Network Rail
•Major contractor on London’s Crossrail project
•Roadbuilding and bridges

Defence
•Manages infrastructure and 50,000 homes for Ministry of Defence

Education
•Designed and built 150 schools
•Services such as catering and cleaning at 875 schools

Prisons
•Maintenance and repairs at about half of UK prisons

Libraries
•Manages several public libraries in England

Energy
•Building substations, overhead cables and other works for National Grid

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Carillion’s share price plunged by a further 29% on Friday and it has now lost 94% of its value in a year, meaning a company once worth £2bn is now valued at £61m.

Its value is dwarfed by its £900m debt pile and its £580m pension deficit, the latter of which was the subject of discussions on Friday involving the Pensions Regulator and the Pension Protection Fund, the government’s lifeboat that ensures retirement payouts continue if a company goes bust.

EY has been lined up to manage an administration that could be triggered as soon as Monday if no rescue plan for Carillion can be agreed at discussions on Sunday. That would effectively put EY in charge of Carillion’s government contracts until buyers can be found for chunks of the company.

The government has said it has contingency plans to handle the contracts if Carillion goes under. The Cabinet Office declined to comment on the rescue talks.

Controversial contracts

The government has come in for criticism for continuing to award a string of major contracts to Carillion despite its repeated profit warnings. Here is a list of the deals.

10 July 2017 – first profit warning

Carillion downgrades its profit forecasts after taking an £845m hit on the value of contracts. Chief executive Richard Howson quits and its shares fall 39%.

17 July – contract award

The government awards £1.4bn of HS2 contracts to a joint venture including Carillion.

18 July – contract award

Ministry of Defence hands Carillion a £158m contract to manage services such as catering and accommodation at 233 military facilities.

29 September – second profit warning

Carillion issues a fresh profit warning after unveiling a half-year loss of £1.15bn, which it calls a “disappointing set of results”.

6 November – contract award

Network Rail awards Carillion £62m contract to electrify the London-to-Corby rail line.

17 November – third profit warning

Carillion says it is seeking an easing of the terms of its debts, after problems with key contracts forced it to downgrade profit forecasts again.

20 November – contract award

The government’s Education and Skills Funding Agency awards £12m in schools building contracts to Carillion, despite what the interim chief executive, Keith Cochrane, calls the group’s “current challenges”.

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