The Motley Fool

What Carillion plc liquidation means for shareholders

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Question mark made up of pound symbols
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.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. 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 click below to discover how you can take advantage of this.