The Motley Fool

What Carillion plc liquidation means for shareholders

Image source: Getty Images.

Over the weekend it became apparent that a rescue deal for construction and services group Carillion (LSE: CLLN) was unlikely.

On Monday morning the group released a statement to the stock exchange announcing the compulsory liquidation of the business. Trading of the firm’s shares has been automatically suspended as a result.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The effects of Carillion’s failure on public services are being discussed widely elsewhere, so I’m going to concentrate on what this means for the firm’s remaining shareholders.

Why hasn’t the company been saved?

Carillion’s lenders appear to have refused to provide the extra loans needed to keep the company going.

The amount of money needed was too large to be raised through a rights issue, and it looks as though the lenders were not willing to consider swapping some of their loans for an equity stake in the firm.

Why liquidation not administration?

Carillion has gone into compulsory liquidation. This is triggered by a court order and is managed by the Official Receiver, a government agent. It’s relatively unusual for a company to get straight to compulsory liquidation, rather than into administration.

The difference is that when a company goes into administration, the administrator’s goal is generally to find a way of saving the business. Whereas with liquidation, the aim is to sell the assets to raise cash to repay creditors. The company itself is normally wound up.

Carillion and its creditors may have chosen the liquidation route because the government will have to be heavily involved in the process as it will need to fund the continuation of some contracts until buyers are found.

What happens now?

Carillion’s main assets are its contracts, some of which stretch over many years and involve thousands of employees.

The Official Receiver will try to find buyers for these contracts. These might be companies operating in the same sector as Carillion, or other investors willing to create a corporate vehicle to operate the contracts. There’s also a possibility the government might take some contracts in-house.

Money raised by selling these assets will be used to repay some of the £900m+ of debt the company owes to its creditors. However, it seems unlikely to me that selling the firm’s assets will raise enough cash to completely satisfy those creditors.

Warning signs

In June last year, Carillion shares were trading on around six times forecast profits with a prospective yield of nearly 10%.

This extremely cheap valuation was a warning that the market saw problems ahead. Average net debt had risen from just over £200m in 2011 to nearly £600m in 2016, even though profits had remained flat.

July’s £845m contract impairment charge was the final straw. It soon became apparent that Carillion couldn’t continue without extra financing, which its lenders have now refused to provide.

Will shareholders get anything?

In a liquidation, shareholders will only receive any cash if there are surplus assets after a firm’s creditors have been satisfied.

Carillion’s last set of published accounts were published in September. These revealed that after more than £1bn of contract writedowns, the group had debts and other liabilities totalling £4.1bn, but assets worth just £3.7bn.

As the firm’s liabilities appear to be greater than its assets, I believe shareholders should expect to record a total loss on this stock.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.