Carillion collapse spawns collateral damage and opportunity
Comment Martin Flanagan
The chequered domino effect of Carillion’s collapse continues. Construction firm Galliford Try is having to raise an extra £150 million in new equity capital in the short term to handle the impact of its entanglement in Carillion’s fall.
Galliford Try had been part of a joint venture ( j/v) with the failed group and Balfour Beatty to build the Aberdeen Western Peripheral Route (AWPR), a key piece of Scottish infrastructure, but its partner’s liquidation means it is likely to have to stump up an additional £30m to £40m to the project.
Galliford’s dilemma is that this would divert necessary investment capital from some of its other businesses where there are strong growth opportunities – namely Linden Homes and its Partnerships & Regeneration division. The company has therefore been caught between the rock of public service commitments and the hard place of potentially missed opportunities elsewhere. Hence the recourse to new equity capital to square the books. But there is also business opportunity in the Carillion backwash. Outsourcing giant Serco has engineered a hefty discount on its deal to buy a raft of healthcare contracts from the services and construction business before it went bust.
Serco said it will now pay £29.7m for the contracts, down from the £47.7m first agreed in December. The cut recognises the contracts will have no working capital and will come with none of the usual guarantees on revenues etc.
However, it is still a potential round-the-corner win for Serco as the latter says the potential revenues and profitability of the contracts are “substantially unchanged” from the December agreement. In short, Serco gets a chance to beef up its healthcare business for much reduced financial exposure. We will see similar ramifications of Carillion’s implosion, given the fallen giant’s major UK footprint and labyrinthine contract and j/v arrangements.
Former partners, like Galliford, are likely to have to take exceptional financial provisions as they take up the slack on various project commitments. But Whitehall and the liquidators of Carillion are in a tough place on renegotiating public services contracts, and that will enable companies taking over the work to strike hard bargains.