July 19, 2017 by tradersnote
Carillion shares fell in price over the course of a traumatic three-day period in July 2017, wiping over seventy percent from the value of the major UK government contractors. Why was this the case was a question asked by many during that period and in the aftermath when Carillion shares staged a small comeback. How could such a large government contractor with a wide ranging set of contracts at home and abroad, find itself in such dire financial straits and what could be the underlying cause for this massive fall. This was certainly a matter of vital and urgent interest not only for Carillion’s shareholders but also for those hundreds if not thousands of subcontractors all over the UK and all over the wider world, who relied on Carillion for their pay cheques. What could be so wrong with such a seemingly well-established company? When you considered that Carillion was the largest manager of military bases for the UK’s Ministry of Defence, that it built railways and roads for Network Rail and the Highway Agency, that it built hospitals abroad and schools and many other services for local governments all over the United Kingdom, that it employed more than 50,000 people worldwide, how could such a company suffer such a dreadful short term loss? In short, what had been happening to Carillion share
Carillion shares were, it seems vulnerable because the company itself exhibited similar vulnerability, being based on much shakier foundations than many thought, though some insiders had been pointing out Carillion’s uncertain state for many years. To put things at their most basic, Carillion found itself in a position where it had no real assets and an awfully large amount of debt. In fact, Carillion shares suffered their calamitous fall against the background of an increase in debt from £42 million in 2010 to £695 million by the end of the first half of 2017, predicted to rise as high as £800 million by the end of the year. To place this in perspective the worth of the company after the fall was £250 million, which did not in any believable way balanced against pension debts alone of £633 million. As talk of either bankruptcy or of desperate measures taken to avoid such filled channels of discussion, there was the talk of a possible solution being found in a heavily diluted equity option of £500 million. We should again note this amount of this valuation to perhaps get some idea of why Carillion’s shares were performing as they were in July of 2017. Why would any potential investors be attracted to such a diluted option, especially when Carillion’s trustees would have the first claim? As concerns grew over Carillion’s future viability grew, and as warning signs appeared with the company increasingly employing the controversial practice of ‘reverse-factoring’ so the shares price suffered correspondingly. What does the future hold for Carillion? It is difficult to be sure but undoubtedly there are troubled times ahead for this particular government contractor.
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