The situation with Carillion seems to support the old adage: “If you owe the bank £100, it’s your problem, if you own the bank £10m it’s the bank’s problem.”
In this case, last week’s theoretical, but realistic prospect of the melt-down of Carillion looked like the banks, bondholders and shareholders would have a problem, but this morning, the UK government has a huge problem.
Carillion has, after all, taken on a lot of risk from the government, simply because running contracts in return for money is a form of accepting risk. But the level of exposure the government faces became clear as this turned from a corporate finance problem to a government headache.
To appreciate the scale of the challenge, this link shows just one aspect of the government’s exposure to the company – in the defence area. In the recent past, the government also continued to award contracts worth hundreds of millions to the company, despite one, then another profit warning. Perhaps the intention was to keep cashflow flowing, in the hope that the company would turn around and continue to manage these risks on behalf of the government.
The cash didn’t keep flowing and the company hasn’t turned around.
The government has now ‘crystallised its responsibilities’ and in solving company’s problems, ministers now must decide how they want to manage the coming few days, weeks and months. They have a few options:
- temporarily re-nationalise some of the service contracts, therefore maintaining continuity of service (in defence and prison contracts this is particularly important)
- at a corporate level, hope for and encourage debt for equity swaps and plough on while restructuring on an ongoing basis
- find trade buyers for some of the businesses or contracts and inject some funding for an interim period on critical strategic infrastructure projects in order to maintain continuity and retain key staff
- JV partners of Carillion take over contracts (maybe with government guarantees) in a way that ensures continuity on contracts
- a mix of the above
- none of the above, or anything else the government has planned with the administrator
The extent to which government-led crisis and contingency management planning has been going on – and for how long – will be directly related to how ‘bumpless’ the transfer is between Carillon and a new solution, like those listed above. I’d expect any JV partners to have been working overtime since September (the last profit warning from Carillion) to ensure an orderly transfer of responsibilities.
Compounding the woes, lurking in the background is the spectre of the government’s pension lifeboat having to take over the 28,000-member scheme, which reports a deficit of £580m. Costs could end up being more than twice that, but either way, it’s additional angst for the government and politically another point of exposure.
We do know that the pension situation, and the scope and scale of government work that was contracted out to Carillion, will clearly mean the taxpayer will take a hit on this insolvency. The unknown is how and how much it will cost.
Lessons for crisis management? A business would undoubtedly have n process by which it identifies big-ticket potential hits to the organization in a systematic way – via an Enterprise Risk Management process, for example. In this case, they will have generic, adaptable plans to activate if a supplier or a customer goes out of business. The plans will be developed on a risk basis (how likely how damaging), including from a ‘worst-case, what if’ scenario planning perspective, and contingencies will be put in place in good time.
So how will we know whether the government (and constituent departments that contract with Carillion) has been through a similar exercise? If they have, while the first few days will naturally be a bit ragged, the stabilising solutions should be ready to implement relatively quickly and smoothly. If it hasn’t planned or planning is incomplete, expect a more extended period of uncertainty as solutions are more obviously invented and cobbled together on a tactical, case-by-case basis.
And finally, the plunge in the company’s worth from £2billion to Friday’s closing valuation of £61m reminded me of the time the company I worked for took a 60% hit on the share price in one day, and then fell further to just over one Swiss Franc. The national financial magazine here characterised the situation thus: “Question: What’s the difference between [the company’s] share price and a sausage? Answer: You can eat a sausage.”
Cruel, but in that case, the company recovered, stabilised and thrived, but it was scary.
[Thanks to Terry Robinson for allowing his photo above to be used via a Creative Commons licence]