LONDON (ShareCast) - (ShareCast News) - Construction group Carillion will be put into liquidation after crisis talks with the government and creditors collapsed early on Monday.
The Official Receiver has been appointed to take over the administration of the company, which is a key government supplier on the HS2 rail project and dozens of construction contracts including on education, health and roads. Carillion employs around 43,000 staff around the world, of which roughly 20,000 are in the UK.

While the government will provide funding to maintain public services run by Carillion, neither it, nor its main creditors Barclays, HSBC and Santander, would offer the level of support the company needed to stay solvent.

Cabinet Office minister David Lidlington said the government and taxpayers could not be expected to bail out a private sector company, especially when Carillion's problems had not arisen directly from its public sector work. He urged workers to continue to come in to work as "the government will pay your wages, via the Official Receiver". He told BBC radio that the government will take on some contracts and others will be re-tendered to other contractors.

As part of the last-ditch talks over the weekend, Carillion had also asked its creditors and the government for "limited short term financial support", to enable it to continue to trade whilst longer term discussions continued. The London-listed company, where debt averaged between £875m and £925m last year, had reportedly asked the government to stump up some of the capital it owed to its lenders and for some of its troublesome contracts to be taken back into public control, including three public private partnership contracts.

COMPULSORY LIQUIDATION

But after no deal was reached by Monday morning, Carillion said it had "concluded that it had no choice but to take steps to enter into compulsory liquidation with immediate effect".

Chairman Philip Green said: "This is a very sad day for Carillion, for our colleagues, suppliers and customers that we have been proud to serve over many years."

He added: "We understand that HM Government will be providing the necessary funding required by the official receiver to maintain the public services carried on by Carillion staff, subcontractors and suppliers."

Carillion has a pensions scheme deficit of £580m. But pensions experts pointed out that the Pension Protection Fund will be able to absorb this from its current funds.

Assuming the company goes into administration and the pension scheme is taken over by the PPF, retired members will continue to receive their pensions in full, whilst those yet to reach retirement will see cuts of typically between 10% and 20%, said Tom McPhail of Hargreaves Lansdown.

Carillion had begun talks with its lenders in November as it warned that debt terms could be breached as full-year profits were heading "materially lower" than forecast. Last week these talks stepped up a level, with the company's pensions trustees joining the Cabinet Office, Pensions Regulator and PPF in an "emergency summit" on Thursday, while the government confirmed it had drawn up contingency plans for the event of a collapse.

On Monday an application was made to the High Court for a compulsory liquidation of Carillion before opening of business and an order was granted to appoint the Official Receiver as the liquidator, with PricewaterhouseCoopers expected to be appointed to act on behalf. The Financial Conduct Authority confirmed on Monday that it had suspended shares from the London Stock Exchange official list effective from 7:45 GMT following the company's announcement.

CONCERNS FOR STAFF, SUBCONTACTORS AND SUPPLIERS

There was widespread concerns for the impact of Carillion's collapse on the wider supply chain.

"Many of these small firms are the lifeblood of their community but their exposure to Carillion's debt puts them at serious risk," said Jim Kennedy, of trade union Unite.

Unite also called for a government inquiry into "how a company that loaded itself with debt, which undercut competitors with unsustainable bids, which hoovered up vats of public money, and that had repeatedly alerted the government to its own financial shortcomings got its hands on so much of the public sector and taxpayers' cash".

The Public Administration and Constitutional Affairs Committee later in the day confirmed it was launching an new inquiry called "Sourcing public services: lessons to be learned from the collapse of Carillion". Elsewhere, the Financial Reporting Council said it was had been "actively monitoring" the situation and reminded that it has "powers to investigate the circumstances relating to the audit of Carillion as well as the actions of the relevant accounting professionals".

A number of Carillion's joint venture partners on government contracts rushed to put out statements on Monday. Kier Group, a partner on two portions of the HS2 rail line assured that it had put contingency plans in place for HS2 and the pair's joint venture on the Highways England smart motorways programme. Balfour Beatty and Galliford Try also notified of the impact of the collapse for their joint projects, which include the Aberdeen Western highway contract.

HICL Infrastructure Company, an investor in public private partnerships, had outsourced facilities management services to Carillion for 10 projects and said it expected to secure replacement service providers as soon as possible, while International Public Partnerships said similar, advising that the effect from FM services provided by Carillion on its portfolio was nearer 3%.

INVESTORS 'IN THE LURCH'

Expectations that Carillion's contracts will be re-tendered sent shares in outsourcing rivals Serco and G4S up 0.8%, Capita down almost 1%, with construction groups Balfour Beatty down 0.5%, Kier up 0.1%.

Investors in Carillion, which first notified the market of its troubles last July and is under investigation by the FCA over the timing of this announcement after a series of sanguine reports that preceded it, have seen the group's market value crash around 90% from more than £1bn to close to £60m over the past year.

"Investors holding out for a turnaround are left in the lurch," said analyst Neil Wilson at ETX Capital. "This was a case of bad management and pitching for contracts at any price, but the government and banks could, or may be should, have done more.

"Given the government was already up to its neck in this, shareholders have every right to be disappointed. The FCA is looking at the timing of profits warnings but you could also argue that the number and value of government contracts being awarded following those warnings also misled investors by painting a false picture of health. They may also question why banks that were bailed out by taxpayers were among those who forced the company to the brink. A terrible mess and one that will take a long time to clean up."

IG's Joshua Mahoney added: "The decision by the UK government to award a whole host of notable contracts to a firm which had issued three back-to-back profit warnings is clearly coming back to haunt them, adding another headache for beleaguered Prime Minister Theresa May. The taxpayers are ultimately set to foot the bill for covering any costs arising from the firm's inability to continue delivering on those contracts."

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