The fall out from Carillion collapse will be felt far and wide

Carillion logo

Carillion, the U.K.'s second largest construction company, collapsed today taking with it 19,000 jobs in the U.K., wiping out shareholders and causing huge write-offs for its lenders. The collapse leaves Carillion's creditors, which include Barclays, HSBC, Lloyds Banking Group and Santander UK with a combined hit of up to £2 billion.  But the pain could be felt for months or even years to come as the effects on sub-contractors, consultants and partners become fully evident. The construction industry like automobiles involve many parties in large projects. 

Carillion contract wins 2017

Carillion was spun out of Tarmac in 1999 before acquiring George Wimpey, McAlpine and Mowlem. By the end of 2017 its net borrowings had ballooned to over £800 million as a number of contracts soured due to engineering challenges including the £750 million Aberdeen bypass and the £350 million Midland Metropolitan Hospital in Smethwick and the Royal Liverpool University.

 In July, it shocked the market with £845 million of write-downs (the three projects above alone accounted for £375 million) and the departure of its chief executive Richard Howson.

The company's market capitalisation at the end of last week was just over £60 million, which was dwarfed by its debts and it also had a £587 million pension liability. 

Balfour Beatty has had to say goodbye to an additional £45 million due to three joint ventures on road projects with Carillion in Aberdeenshire, Cambridgeshire and north-west England.  In 2014,  Carillion briefly tried a  £2 billion takeover of Balfour Beatty.

Galliford Try says it expects to pay up to £40m to complete a joint venture it was working on with Carillion on the Aberdeen Western Peripheral Route project in Scotland.

The situation is not too different to that during the financial crisis of 2008/2009. Before declaring bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch). Under the notorious Dick Fuld, when it failed, the repercussions were felt across the financial world as its complex entanglements with hundreds of companies were unraveled over many years. 

After today's news hundreds of smaller companies in the U.K. as well as in places like Canada could collapse and thousands of pensioners will be impacted with reduced payments. 28,000 members will now be subject to the Pension Protection Fund and those who are transferred to the PPF, and not yet retired, will receive 90 per cent of the pension they were expecting, up to a limit. Members already getting pensions will continue to receive 100 per cent of their benefits but may see lower annual increases.

Despite the obvious stress the company was facing the awarding of additional contracts by the government has been criticized. Since July 2017, the government has awarded 10 awards or frameworks with a total value of £1.3 billion to the company, of which £137 million was in actual contract awards and £1.2bn was in Carillion’s estimated share of frameworks with multiple suppliers, such as the HS2 high speed rail contract.

At the end Carillion failed due to too many acquisitions, too much complexity, bad decisions and governance. At to that underbidding on complex contracts which made most of them unsustainable - any problems with construction or engineering and they became hugely unprofitable. Despite the high salaries at the top of the company, they failed to manage Carillion in a sustainable fashion. Another British company destroyed by incompetence at the highest levels. 

 Richard Howson

Richard Howson

 Keith Cochrane

Keith Cochrane

Richard Howson, Carillion’s former chief executive from 2012 until July 2017 earned £1.5 million in 2016, including £591,000 in bonuses. He will continue to receive his £660,000 salary and £28,000 benefits for another year, until October 2018. He was replaced by Keith Cochrane.