Carillion Chair “upbeat” days before massive profit warning

01 March 2018

Carillion board minutes (PDF PDF 2.62 MB) published by the Work and Pensions and Business, Energy and Industrial Strategy Committees on Thursday 1 March 2018, demonstrate what appears to be an extraordinary refusal to accept clear evidence of the firm's rapidly deteriorating financial position. 

The minutes record former company Chairman, Philip Green, who had been on the board since 2011 and Chairman since 2014, expressing his belief that "work continued toward a positive and upbeat announcement for Monday [10 July], focusing on the strength of the business as a compelling and attractive proposition" – five days before the Company announced the £845m profit warning that marked the beginning of the company's public descent into insolvency.  

'Carillion's senior management could neither produce nor deliver an investment proposition that would convince shareholders'

A response from Morgan Stanley (PDF PDF 231 KB), also published today, to the Committees' queries to the list of firms attributed some role in the demise of Carillion shows that in mid-April 2017 – around the time that former CFO Emma Mercer raised her "whistle-blowing" concerns - the Board were advised to consider a potential equity raise by way of a rights issue. The Company agreed to this in May and the rights issue was planned to launch alongside the Company’s trading update in July 2017.

However, the 5 July minutes show that Morgan Stanley and Stifel (a brokering and investment banking firm) "were not able to underwrite the proposed equity issue" and had withdrawn as sponsors. They found: "The executive directors and advisers had worked hard to enhance the investment case…but [it] was materially short"..."the expected impact to the share price from the contract review given the current market rating meant that the investment case was insufficient to support an underwriting."

The letter from Morgan Stanley states they were "increasingly of the view that Carillion's senior management could neither produce nor deliver an investment proposition that would convince shareholders and new investors to support the potential rights issue."

The Board simply refused to accept their brokers' assessment, disengaged the firm and tried another

"The Board also discussed the rationale given by Mr Moorhouse, reflecting that it was not credible given that there had been no obvious change to the market position, the position of the business or its prospects since he and Mr Arch had represented to the Board that an equity issue was viable and that the two banks would expect to underwrite it. Whilst it was necessary to continue to work with them as brokers in the short term that would clearly change in the future."

Morgan Stanley's letter confirms that Carillion subsequently disengaged with the firm: "Following Carillion’s announcement of its trading update for the first half of 2017 on 10 July 2017…the monthly meetings that had previously taken place between the Firm and Carillion did not continue. HSBC was appointed as Joint Corporate Broker shortly thereafter. After Carillion released its interim financial results on 29 September 2017, Carillion sought our advice less frequently."

When Morgan Stanley and Stifel withdrew as sponsors of a rights issue, the Board simply sought a new one, turning instead to HSBC who were appointed as joint corporate broker from 14 July 2017. The Chairman…"noted also that a conversation had been held with HSBC with a  view to the possibility that it may act as sponsor, either alone or in combination with another party…" However, neither the rights issue nor a subsequent planned debt for equity swap ever materialised. 

Zafar Khan was similarly dismissed in September 2017, after reiterating the reality of Carillion’s financial position to the Board.

Difficult to believe company Chairman unaware

Rt Hon Frank Field MP, Chair of the Work and Pensions Committee, said:

"Carillion's Chair appeared to lack even a tenuous grasp on the reality of the Company's situation. Five days before the profit warning that heralded the firm's public spiral into insolvency, Philip Green stands like the Mayor of Pompeii - smoke billowing from the volcano behind him, lava cascading down the slopes - trumpeting the forthcoming revelries of the village fete.

It is difficult to believe the Chairman of the company was unaware of its position, but equally difficult to comprehend his assessment if he was."

Woeful lack of leadership or no grip on reality

Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) Committee said:

"A good board should be asking difficult questions. By contrast, the Carillion board, when faced with difficult answers, declined to face up to facts and did nothing to address the causes of the company's decline.

Its Chairman, Philip Green's assessment of Carillion as "a compelling and attractive proposition” shows either a woeful lack of leadership or no grip on reality."

Further information

Image: Creative Commons (Elliot Brown)

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