Over the weekend it became apparent that a rescue deal for construction and services group Carillion (LSE: CLLN) was unlikely.
On Monday morning the group released a statement to the stock exchange announcing the compulsory liquidation of the business. Trading of the firm’s shares has been automatically suspended as a result.
The effects of Carillion’s failure on public services are being discussed widely elsewhere, so I’m going to concentrate on what this means for the firm’s remaining shareholders.
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Why hasn’t the company been saved?
Carillion’s lenders appear to have refused to provide the extra loans needed to keep the company going.
The amount of money needed was too large to be raised through a rights issue, and it looks as though the lenders were not willing to consider swapping some of their loans for an equity stake in the firm.
Why liquidation not administration?
Carillion has gone into compulsory liquidation. This is triggered by a court order and is managed by the Official Receiver, a government agent. It’s relatively unusual for a company to get straight to compulsory liquidation, rather than into administration.
The difference is that when a company goes into administration, the administrator’s goal is generally to find a way of saving the business. Whereas with liquidation, the aim is to sell the assets to raise cash to repay creditors. The company itself is normally wound up.
Carillion and its creditors may have chosen the liquidation route because the government will have to be heavily involved in the process as it will need to fund the continuation of some contracts until buyers are found.
What happens now?
Carillion’s main assets are its contracts, some of which stretch over many years and involve thousands of employees.
The Official Receiver will try to find buyers for these contracts. These might be companies operating in the same sector as Carillion, or other investors willing to create a corporate vehicle to operate the contracts. There’s also a possibility the government might take some contracts in-house.
Money raised by selling these assets will be used to repay some of the £900m+ of debt the company owes to its creditors. However, it seems unlikely to me that selling the firm’s assets will raise enough cash to completely satisfy those creditors.
Warning signs
In June last year, Carillion shares were trading on around six times forecast profits with a prospective yield of nearly 10%.
This extremely cheap valuation was a warning that the market saw problems ahead. Average net debt had risen from just over £200m in 2011 to nearly £600m in 2016, even though profits had remained flat.
July’s £845m contract impairment charge was the final straw. It soon became apparent that Carillion couldn’t continue without extra financing, which its lenders have now refused to provide.
Will shareholders get anything?
In a liquidation, shareholders will only receive any cash if there are surplus assets after a firm’s creditors have been satisfied.
Carillion’s last set of published accounts were published in September. These revealed that after more than £1bn of contract writedowns, the group had debts and other liabilities totalling £4.1bn, but assets worth just £3.7bn.
As the firm’s liabilities appear to be greater than its assets, I believe shareholders should expect to record a total loss on this stock.
