Carillion under growing pressure to inject funds

LAST week will be one that Carillion shareholders would rather forget. The construction and support services group revealed that a review of its contracts by KPMG had resulted in an £845million write-down in its construction business.

Net borrowing at the end of the first half climbed towards £695million, despite targets to shrink it by the end of the year. An £800million-plus pension deficit makes the debt situation all the more precarious.

CEO Richard Howson stood down, with Keith Cochrane stepping in on an interim basis. Dividends were suspended and “for sale” signs have gone up on various Middle East firms. The “public private partnership” construction market is being exited altogether. So where did it all go wrong? Construction is a tough industry. Margins of below 3 per cent are the norm, so slightly mispricing a contract can demolish profits. Carillion’s problems go a step further, with the group writing off large chunks of revenue from four major contracts. What has made it even more painful is the state of its balance sheet.

With cash struggling to make it through the door, the group is being forced to borrow to fund operations. Long term, that is unsustainable, and today’s write-down will suck another £100million-£150million out of the business. We’ll have to wait until September for details of Cochrane’s strategy. But the immediate focus is hanging on to as much cash as possible. Sales of businesses are expected to bring in £125million, cutting the dividend should save £80million and there is a chance the group will be able to recover more of the money it’s owed.

However, longer term, it looks like Carillion is going to have to raise money to get rid of the debt. That suggests a rights issue is on the horizon. With the share price tumbling as much as 70 per cent, raising the £500million-£600million, analysts believe is needed would mean tripling the number of shares in issue.

There is always the possibility that a suitor will appear to buy the business, but we are not sure any of the domestic players are obvious candidates. In the absence of a white knight, and with the prospect of a rights issue looming, Carillion’s troubles may not be over.

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