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Major shareholders views on Carillion collapse published

19 February 2018

At the end of January the Work and Pensions and Business, Energy and Industrial Strategy Committees wrote to major shareholders in Carillion, with questions on their interaction with the company and the timing and motivation of their share selloffs.

Investors were fleeing for the hills

The Committees publish their responses, which show a variety of different perceptions about Carillion among its institutional investors, and very different levels of engagement with the board.

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

"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."

Unsustainably high levels of debt

Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (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."

Kiltearn were considering suing Carillion

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

  • At the AGM in May 2017, Kiltearn voted all its shares against the Remuneration Report because of "concerns about Mr. Howson's level of remuneration relative to the company's level of net income"
  • They state that "the 845 million provision effectively destroyed Carillion's capital base" that the company had become "impossible to value as it was not clear what future cash flows would be as there was no concrete information on critical factors" and further that Carillion's published information, including historic annual reports, could "no longer be considered reliable and consequently no effective assessment of its finances could be made."
  • Kiltearn began selling shares on 3 August. At a meeting with Carillion on 13 October, they state former interim CE Keith Cochrane could only provide “limited and vague” responses to “fundamental” questions and consequently Kiltearn sold all shares by 4 January 2018.

'The board showed no inclination to drive the management to change'

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."

Blackrock's investment management arm's shorting of shares in Carillion has been widely reported. They also managed its defined contribution pension scheme, leading to questions over conflict of interest. Their response states "the stewardship activities of BIS are separate from the investment decisions made by BlackRock's portfolio management teams.

As referenced in BlackRock's public statements to date in relation to the liquidation of the Company, BlackRock's various portfolio management teams have maintained long and short positions in the Company on behalf of a variety of its clients since 1 March 2017 ... Sales within those portfolios will necessarily have resulted from outflows, decreases in the Company's weight in the index or the Company's removal entirely from that index.

Deleted from the FTSE UK Dividend Plus

By way of example, the Company was deleted from the FTSE UK Dividend Plus, published by FTSE Russell, with effect from 13 July 2017 following the Company's suspension of dividends. Such events will have led to an effectively automatic obligation on BlackRock and, indeed, on other index-tracking fund managers, to sell shares in the Company."

Letko Brosseau: A Canadian company which had no engagement with Board until it took them four attempts to arrange a meeting with Zafar Khan in July 2017. They saw no reason to divest based on the 2016 accounts and were initially prepared to back Carillion following the first profit warning, saying they "were even prepared to consider a further injection of capital". They finally lost faith with the November 2017 profit warning and breach of covenants and the "probability of a recovery was unlikely", and sold all shares within a few days. 

Brewin Dolphin: Gradually reduced their shareholding during 2017, which accelerated after the July 10 profit warning.

UBS: held a small proportion of Carillion shares (0.1%) by July 2017 primarily for hedging purposes. In view of small proportion of shares, they did not engage with the board at all during the period in question.

Number of shares% of issued share capital held
Blackrock, Inck37,940,5328.81%
Deutsche Bank AG25,031,5285.82%
UBS Investment Bank and UBS Group AG21,844,0955.08%
Kiltearn Partners LLP21,542,4445.01%
Brewin Dolphin Limited21,501,8915.00%
Letko, Brosseau & Associates Inc.21,367,5534.97%
Standard Life Investments (Holdings) Limited21,331,2434.96%

Further information

Image: iStock