Carillion crisis: have Midland Met Hospital woes played a role?
Shares in construction and services giant Carillion have continued to fall, with the company losing half its stock market value since Monday morning.
Meanwhile there is speculation that problems with the Midland Metropolitan Hospital contract may have played a role in the current crisis.
After plunging 39 per cent on Monday, shares were down another 15 per cent yesterday. So far the crisis has has wiped £400 million off Carillion's FTSE valuation.
It follows revelations that the Wolverhampton-based company is having to put aside an £825 million provision to cover contract losses and pulling out of markets in Canada and the Middle East,
Carillion says its problems have centred on three public private partnership (PPP) contracts in the UK and another major contract in the Middle East. These are expected to cost the company another £100m to £150m in cash costs by the end of next year.
The company is refusing to name the trio of UK contracts, saying it is 'commercially sensitive', but it revealed in May that problems with building the £350m Midland Metropolitan Hospital in Smethwick would delay its opening by around six months.
Health bosses were dealt a blow when it was discovered the fitting of pipes and wires would take longer than expected – forcing the launch of the Midland Met to be put back until spring 2019. It had been due to open in October next year.
Carillion is also facing expensive delays building the £335m Royal Liverpool Hospital and a £550m stretch of the Aberdeen bypass it is constructing in a joint venture with Balfour Beatty and Galliford Try. Both contracts are now running up to a year behind schedule.
The crisis has already claimed the scalp of the company's chief executive, Richard Howson – replaced by senior non-executive director Keith Cochrane as interim boss – and Carillion Building managing director Phil Wakefield.
Mr Cochrane, former head of Scottish engineering group Weir, said he had only been appointed to the top job on Sunday.
Carillion is now trying to slash its costs, pulling out of PPP construction work in the UK and out of construction work in Oman, Saudi Arabia and Egypt.
With around 400 people based at its headquarters in Wolverhampton city centre, at Carillion House, the company has a workforce of around 48,500 in the UK, the Middle East and Canada. There has been no indication yet of the impact of the cost cutting on its staff numbers.
One of the biggest PPP contracters in the UK, Carillion is also a major operator in railways and roads maintenance and has contracts with the likes of Network Rail and the Highways Agency. It is also a major services and buildings maintenance contractor with the Ministry of Defence.
Among its other problems, it expects revenue will be well down on last year's £5.2bn, possibly as low as £4.8bn, and the company also faces a growing debt pile. It has now reached £695m but that is expected to rise to £775m or even £800m this year.
Talking to analysts this week, Mr Cochrane said that “no option is off the table” for the company. “I don’t shy away from making the tough calls,” he added.
So far that has seen Carillion cancelling this year's dividend payout to shareholders, which will save it £80 million. It also plans to raise £125m by selling off 'non core' parts of the business.
While some analysts believe Carillion will have to raise cash by selling new shares – probably diluting the value of its existing stock – others have raised the prospect that the company may now be vulnerable to a takeover approach, especially as its share price is now so low. Worth over £3 per share at the end of 2015, it was below £1 yesterday.
Andrew Gibb, an analyst with RBC, said: “In our view, the group would need to raise a significant amount — £500m plus — to restore stability. And in the near term, we would expect others to be running the slide rule over the business.”
The idea of a takeover is a real reversal of fortunes – just three years ago Carillion was making an unsuccesful bid for rival Balfour Beatty.
Investment bank Liberum also believes Carillion will need to raise cash to fund an overhaul of the business. “At the moment, we question whether Carillion has the funds to restructure,” the broker warned.
“Given the weaker profits, higher debt, need for restructuring, limited proceeds from disposals and working capital unwind in construction, we believe that Carillion will need to raise a significant amount of more money.”
