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Sat October 20 2018

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Carillion shareholders ‘ran for the hills’

19 Feb At least one major shareholder of Carillion was contemplating legal action before the contractor’s demise while others were already “fleeing for the hills”.

MPs conducting an inquiry into the collapse of Carillion wrote to major shareholders in Carillion three weeks ago, with questions on their interaction with the company and the timing and reason of any share disposals. The responses have now been published1.

The response from Kiltearn Partners, which held more than 10% of Carillion's shares in May 2017, reveals that it believes "there are clear grounds for an investigation into whether Carillion's management knew, or should have known, about the need for a £845m provision due to receivables on its construction business earlier than July 2017" and that if Carillion had not gone into liquidation, it would have "considered participation in civil legal action against Carillion with a view to recovering a proportion of its clients' crystalised losses".

After the £845m provision warning in July 2017 Kiltearn took the view that Carillion “was no longer possible to value as it was not clear what future cash flows would be as there was no concrete information on critical factors”. It began selling in August and by 13th October had halved its holding.

Kiltearn told the MPs: “Carillion had previously voted against a proposed pay rise for chief executive Richard Howson at the AGM on 3rd May. Mr Howson’s proposed total remuneration was set to increase by 17.7% relative to the prior financial year, whilst Carillion’s net income had fallen 7% over the same period. Carillion’s justification for the increase in remuneration relied heavily on Mr Howson meeting a number of non-financial targets. Kiltearn did not find Carillion’s explanation for the proposed increase in Mr Howson’s remuneration reasonable.”

Standard Life Aberdeen began a process of divestment in December 2015 due to concerns about financial management, strategy and corporate governance which they raised with the board in regular meetings from then until they sold up completely in July 2017.  They “felt that the management was not giving sufficient weight to the probability that trading may deteriorate further or to the downside risk from this scenario given the high level of debt. The board showed no inclination to drive the management to change.”

The investigation into the fall of Carillion is being conducted jointly by two House of Commons select committees: the Work & Pensions and the Business, Energy & Industrial Strategy (BEIS) committees.

Frank Field MP, chair of the Work & Pensions committee, said of the responses received from seven major shareholders: "There is a disconnect here. On one hand, the Carillion directors told us all was sunny until a bolt of Qatari lightning hit them out of the blue. Their stewardship had, they proudly told us, been adjudged ‘best in class’ by their friends at KPMG.

“On the other hand, investors were fleeing for the hills, and it appears those who looked closest ran fastest. We will be taking evidence from the auditors and the investors - as well as demanding more company papers - to get to the bottom of who knew what and, most importantly, when."

Rachel Reeves MP, chair of the BEIS committee, said: "Investors spotted that Carillion was heading for disaster and fled. The company had unsustainably high levels of debt, weak cash-generation and was saddled with a widening pensions deficit. It's a tragedy for those who have lost their jobs and the suppliers left struggling for survival that Carillion directors ignored these issues.

“Carillion's annual reports were worthless as a guide to the true financial health of the company. The fact that it was impossible to get a true sense of the assets, liabilities and cash generation of the business raises serious questions about Carillion's corporate governance. KMPG will have to explain why they signed-off on accounts which appeared to bear so little relation to reality.”

1. www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/news-parliament-2017/carillion-shareholders-17-19

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