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Carillion collapse puts contracts at risk but presents opportunities for sector peers

Carillion's contracts, joint venture partners and lenders are hanging in the balance after confirming its collapse
Carillion has a £1.34bn contract for building works on the new HS2 railway

Carillion PLC (LON:CLLN) has finally admitted defeat.

Following a string of profit warnings over the past year and the failure of talks with its lenders and the government, the construction and services firm confirmed its collapse on Monday.

The company said despite considerable efforts, discussions to secure funding have not been successful and has therefore decided to make an application to the High Court for a compulsory liquidation of the business.  

Its struggles have stemmed from losing money on big contracts and running up large debts.

Carillion’s collapse will mean the government will have to provide funding to maintain the public services run by the contractor.

The group is a major supplier to the government with projects including the HS2 high speed rail line, schools and prisons.

Contracts, joint venture partners and lenders are now hanging in the balance as a result of Carillion's demise.

BT contract 

Carillion has a contract with Openreach, the network division of BT Group plc (LON:BT.A), to provide maintenance, extension and repair work for the UK’s telephone and broadband infrastructure. In February of last year Carillion signed a three-year extension to its agreement with Openreach until the end of 2021.

Transport deals

The company is the second largest supplier to Network Rail. In November it was awarded two maintenance contracts on Network Rail’s Midland Mainline upgrade programme.

Just days after a shock profit warning in July, Carillion bagged a £1.34bn contract for building works on the new HS2 railway, which will link London with the north of England from 2026.

Kier Group PLC (LON:KIE), which works on HS2 and the Highways England smart motorways programme with Carillion, assured investors that won’t be adversely affected because it had put in place contingency plans for each of the shared projects as the collapse had been on the horizon for some time.

Prison and defence 

The company maintains about half of the UK's prisons along with about 50,000 homes for the Ministry of Defence.

Balfour Beatty and Speedy Hire

Carillion has three joint ventures with Balfour Beatty plc (LON:BBY), including major road projects in Aberdeenshire, Cambridgeshire and north-west England.

In a statement today, Balfour said it would take a hit of up to £45mln from the collapse of Carillion.

However, Speedy Hire Plc (LON:SDY) - one of Carillion’s largest suppliers - is expected to be worse off with shares in the equipment rental company falling 6.3% to 56p in morning trading.

Lenders to lose millions of pounds

Carillion’s lenders will also take a hit from the company’s liquidation.

Liberum analysts estimate Carillion owes about £1.5bn to Royal Bank of Scotland Group PLC (LON:RBS), Barclays PLC (LON:BARC), HSBC Holdings PLC (LON:HSBA), Lloyds Banking Group PLC (LON:LLOY) and Santander.

“Crudely, the banks rank ahead of the trade creditors and employees in a liquidation,” Liberum said.

“However, we would expect the banks to lose hundreds of millions of pounds. This will inevitably reduce their appetite for lending.”

Collapse presents silver lining for sector peers

Carillion’s demise inevitably provides contract opportunities for sector peers, according to Liberum.

In December, Carillion agreed to sell a large part of its UK healthcare facilities management business to Serco Group PLC (LON:SRP).

Liberum thinks there may now be an opportunity for Serco to acquire the remaining healthcare assets, or even other assets.

Babcock International Group PLC (LON:BAB) also stands to benefit by picking up Carillion’s MoD contracts.

Meanwhile, Balfour and Costain PLC (LON:COST) could win more rail work with Network Rail with Carillion out of the picture.

Costain and Kier could also potentially win more road works in England.

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January 29 2019
“We believe that our NAV forecasts are conservative and the shares are significantly under-valued given the company’s track record and growth prospects.”

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