UK railway contract gives Carillion a breather
Bengaluru — A consortium including Carillion won a £1.4bn contract on Monday to help build Britain’s High Speed 2 (HS2) railway.
The infrastructure contract offers respite to the builder as it grapples with the aftermath of a write-down battering.
The company’s shares rose 21% to 67.89p in midday trading, after Carillion said it and partners Kier Group and Eiffage had won two lots of work for HS2, set to link London with the north of England from 2026.
The win follows a torrid week for Carillion, which lost 70% of its value after parting ways with CE Richard Howson and booking an £845m writedown due to problematic constructions. Carillion linked the difficulty partly to public partnership construction contracts with governments where builders shoulder the risk of cost overruns. In response, it promised to abandon such contracts and focus on growing infrastructure areas such as telecoms and rail.
"We expect the UK government’s objective of generating economic growth through investing in infrastructure to continue creating opportunities for us to grow our business," interim Carillion CEO Keith Cochrane said.
Transport minister Chris Grayling said he hoped Carillion could overcome the challenges.
"We’ve had secure undertakings from all of the members in the consortium that they will deliver that contract," he told Sky News. "My wish is that Carillion get through their current problems but we’ve made sure that it’s not an issue for these contracts," Grayling said.
Carillion, which says it is the second-largest rail infrastructure services provider in Britain, said stage one of the HS2 contract would run for 16 months and involve a design and a target cost for construction work.
Stage two, seen taking four to five years to complete, will involve the bulk of the construction. Given that the start of the project is some way off, it is undecided what work Carillion will undertake.
"It is encouraging that they can still win government contracts. Our view remains that [Carillion] will survive but the ownership is likely to change significantly," Liberum analysts wrote in a note.
The company’s takings from the contract will be roughly one third, which Liberum pegged at about £450m.
A source close to Carillion said the company’s review of "all options" to shore up its cash position would not have an effect on its ability to deliver work for the project.
On Monday, Cochrane was speaking to investors amid speculation Carillion may have to raise at least £500m, possibly through a rights issue.
The company added HSBC to its list of financial advisers on Friday and has this week hired accounting firm EY to support its strategic review.
Carillion said that it had found ways to reduce average net borrowing, including cost efficiencies, an increased focus on managing working capital and on recoveries as well as cash collection.
"We are moving forward quickly," Cochrane said.
"Alongside our own efforts, EY will provide support across the business and bring an external perspective to our cost reduction and cash collection challenge."