Troubled contractor says review will “focus upon cost reduction and cash collection”

Carillion has appointed EY to help it carry out its review of the business, a week after it announced a provision of £845m and saw its share price plummet by 70%.

The embattled contractor saw its market capitalisation fall to just £242m last week after it revealed it would be taking the £845m hit on a number of loss-making contracts and announced the departure of chief executive Richard Howson.

The government announced today that the firm had won one of the contracts up for grabs on phase two of the High Speed 2 rail link. Ministers have apparently sought assurances from Carillion JV partners Kier and Eiffage theyw eill be able to complete the project, should Carillion be unable to do so.

Carillion said EY would support the strategic review with what it called “a particular focus upon cost reduction and cash collection”. It said it would be “taking immediate action to generate significant cashflow in the short term and achieve a reduction in average net borrowing”. Net debt currently stands at around £900m.

Its board had “identified a number of actions to reduce average net borrowing including further cost efficiencies, an increased focus on managing working capital and on recoveries and cash collection”.

With City analysts reckoning the firm has to find funding of between £400m and £600m to prop up its balance sheet, debt reduction is going to be a key feature of the group’s strategy in the short and medium term.

News of EY’s appointment followed Carillion’s announcement that HSBC had been hired as a joint adviser and corporate broker, as speculation mounted that a bid for the group was on the horizon.

Speaking about the EY move, Keith Cochrane, who is standing in as interim chief executive until a full-time replacement can be found, said: “We are moving forward quickly with the actions outlined last week.

“Alongside our own efforts, EY will provide support across the business and bring an external perspective to our cost reduction and cash collection challenge. My priorities are to reduce the group’s net debt and create a balance sheet that will support Carillion going forward.

“We need to simplify the business and demonstrate that value can again be created for shareholders by focusing the group on its core markets, including infrastructure and property services, in which it has good strengths and leading positions.”

Results of the review, which will look at the 25% or so of the business not covered by a previous probe carried out in conjunction with KPMG, are expected to be announced in September at the time of Carillion’s interims.

EY declined to comment.

                

Kevin Cammack’s view

One of Carillion’s key issues right now is its ability to fund itself. It has average net borrowing of around £900m and with facilities at full stretch it wouldn’t take much more strain to prompt drastic action from its banks.

There is likely to be more money going on existing projects and the pressure on receivables could worsen further. Crucially, the company has got to get the balance sheet in order. Everything else comes in second place. Sure, it may have a vision about where it wants to be, and talk about servicing its customers, but the reality is that the state of the balance sheet will determine the shape of the business in two years’ time. It will take between £400m and £600m to prop up the balance sheet and how does it raise that sort of money? It could look at disposals but it wouldn’t get anything for its construction operation. PFI contracts? It’ll maybe get £50m or £60m for those. It could sell off some of its Canadian support services businesses, but the support services activities in general are making money, so why would it do that?

What about new equity? Perhaps, although it will be massively dilutive. Plus the appetite is not what it was; maybe it was on the day of the provision announcement, but by the end of the week, by which time the stock had lost 70% of its value? Less so, I would say. Debt for equity? Maybe, but with the sort of shareholders it’s got, many of whom might prove reluctant, this could prove tricky.

Frankly, none of these options are anything other than disastrous for equity owenrs, but it’s got to the state where we’re talking about the very survival of the business. New equity is the most likely, with some debt-for-equity. Even with this, the thing is there is not a lot of time to get it sorted. They need to stop the rot and stop it quickly. The profile of the debt, which is the thick end of £1bn, means it needs to be renegotiated by 2019, which in banking terms is not far off.

So they will need agreements in place and in place soon. Basically, they have until the end of this year. Then there are the leadership issues; they have to sort all this out before they can attract a new CEO, or have it contingent upon a new CEO coming in. There might be a white knight option but with £900m of debt, £500m tied up in pensions, £400m in reverse factoring…who has got that kind of money? And then consider the operational issues they’d have to deal with. It could only be an overseas player. Someone with the balance sheet – and the courage – to do it.

Kevin Cammack is an analyst for Cenkos Securities

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