Carillion Fall – Fears for Openreach and Gigaclear Broadband Contracts UPDATE4
Major UK construction firm Carillion, which alongside partner telent holds a number of huge engineering and fibre broadband delivery contracts with operators’ like Openreach (BT) and Gigaclear in the United Kingdom, has this morning begun the process of entering “compulsory liquidation“.
The company, which employs around 20,000 people in the UK (43,000 if you include overseas) and also holds billions of pounds worth of contracts with the Government (e.g. the HS2 high speed train project), has been battling for much of the past year to find a solution for its financial problems (£1.5bn of debt, including a £590m pension deficit).
The combination of loss making contracts and a nasty pension deficit has gradually become a noose around the company’s neck, although Carillion had hoped to find some sort of a rescue from either the banks or the Government (they needed £300m of short-term funding). However, using public money to prop up a failing private company can be a risky business, but then so too is allowing that company to fail and endanger major projects.
In the end Carillion has not been able to secure a rescue deal, which could have consequences for a number of major broadband network and ISP delivery contracts.
Philip Green, Chairman of Carillion, said:
“This is a very sad day for Carillion, for our colleagues, suppliers and customers that we have been proud to serve over many years.
Over recent months huge efforts have been made to restructure Carillion to deliver its sustainable future and the board is very grateful for the huge efforts made by Keith Cochrane, our executive team and many others who have worked tirelessly over this period.
In recent days however we have been unable to secure the funding to support our business plan and it is therefore with the deepest regret that we have arrived at this decision.
We understand that HM Government will be providing the necessary funding required by the Official Receiver to maintain the public services carried on by Carillion staff, subcontractors and suppliers.
Further to the announcement made on 12 January 2018, Carillion continued to engage with its key financial and other stakeholders, including Her Majesty’s Government, over the course of the weekend regarding options to reduce debt and strengthen the group’s balance sheet.
As part of this engagement, Carillion also asked those stakeholders for limited short term financial support, to enable it to continue to trade whilst longer term engagement continued.
Despite considerable efforts, those discussions have not been successful, and the board of Carillion has therefore concluded that it had no choice but to take steps to enter into compulsory liquidation with immediate effect.”
A little over a year ago the Carillion telent joint venture (60:40) announced another 3 year initial extension to their existing framework agreement with Openreach (BT), which would run until the end of 2021 (here). The deal was estimated to be worth around £1.5bn and ensured that Carillion telent would remain the operator’s main delivery partner for the management, maintenance and upgrading of their UK “fibre broadband” (FTTC / FTTP / G.fast etc.) network.
On top of that the same joint venture has only very recently signed a £200m contract with Gigaclear (here) to help the ISP roll-out their Fibre-to-the-Premises (FTTP) broadband network to more than 80,000 premises in rural South West England (e.g. Devon and Somerset), which has already started to deploy. Sadly today’s news would appear to cast a long shadow over the above contract, although Gigaclear isn’t worried.
Matthew Hare, Gigaclear CEO, told ISPreview.co.uk:
“It is very sad news that Carillion has gone into compulsory liquidation. Whilst this may have a minor impact on delivery schedules, Carillion telent is a separate business holding its own funds and bank accounts. Therefore, the contract with Gigaclear to deliver the build for full fibre broadband to the South West region still stands.
We are committed to delivering ultrafast broadband to Devon and Somerset, and already work with alternative partners in the area should the need to relook at capacity and resource arise. We will ensure any disruption to both our potential customers and suppliers is minimised. Our priority remains to connect this area to future proofed, full fibre broadband.”
Meanwhile Openreach is already believed to have conducted a “forensic investigation” of their deal (here) and the hope is that responsibility for the delivery of their contract could now be taken on, in entirety, by telent. Back in July 2017 a spokesperson for Openreach told ISPreview.co.uk that they had “every confidence that our partnership will continue to deliver strong outcomes for our customers and the UK“.
A Spokesperson for Openreach told ISPreview.co.uk:
“We note the reports about our work with Carillion telent (Ct).
The Ct joint venture is one of seven major partners providing similar services to Openreach across Britain and we have robust processes in place to monitor and manage all of our supplier risk.
We have conducted a thorough legal and financial assessment of the JV, and we’re confident in its ongoing viability without Openreach incurring any extra cost or liability.
We’ll continue to work closely with telent to avoid disruption, but we have every confidence that there will be no impact on our national network services and plans.”
Hopefully telent has enough resources to take on all of the responsibility for Openreach’s contract and it’s a similar story for the Gigaclear deal, as well as any others.
UPDATE 9:56am
Added a comment from Gigaclear above.
UPDATE 3:55pm
After a bit of a wait Openreach has now issued their statement, which is added above.
UPDATE 4:27pm
Finally we have a statement from the Carillion telent Joint Venture (CtJV). Mark Plato, CEO of telent, told ISPreview.co.uk, “Given our technical know-how, proven experience and financial strength, we will continue to successfully operate the CtJV activity. We have initiated implementation of our contingency plans this morning to ensure a smooth transition and are maintaining open communications with customers, workers and subcontractors.”
Carillion telent Joint Venture Statement
Following the news this morning of the liquidation of Carillion, telent would like to reassure the customers, workers and sub-contractors of the Carillion telent Joint Venture (CtJV) that the CtJV remains open for business and there will be continuity of delivery to its customers.
Telecoms infrastructure is telent’s core business and it has been involved with providing services to BT to maintain and develop their network for over 20 years.
The CtJV was established with Carillion in 2009, with a legal structure that gives telent the right to step into 100 percent of the Joint Venture in the event of insolvency, enabling the Ct JV to continue to operate, providing continuity and business as normal to its customers, workers and subcontractors.
Existing contracts will be honoured and continue to run as normal, including the two biggest contracts with Openreach and Gigaclear. All workers involved in the joint venture not currently employed by telent will transfer to telent, securing all jobs and delivery of the service. Subcontractors to the CtJV will continue to operate under their existing arrangements.
UPDATE 16th Jan 2018 – 7:05am
A spokesperson for the Government’s Department for Digital, Culture, Media and Sport (DCMS), which oversees the state aid supported Broadband Delivery UK programme, said: “We have been advised by contractors that any impact on the BDUK rollout of superfast broadband is likely to be minimal.”
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on X (Twitter), Mastodon, Facebook and Linkedin.
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Good. NO more smug comments “i’ve got the fastest”
What a ridiculous comment.
This is terrible news for so many industries across the UK, as well as the loss of thousands of jobs. Carillion has built so many aspects of the UK infrastructure over the past decade, it was an essential business in the past, present and future.
Not a very grown up reaction. The failure of Carillion has got huge implications for public services and infrastructure in the UK, not just broadband. It is to be hoped that vital services can be maintained without too much disruption, but there is boud to be some as contracts have to be re-tendered/re-let. What is also of considerable concern is the impact on sub-contractors, some who seem likely to go unpaid for work already carried out. That could put more jobs are risk.
@AndyH
But, ultimately, atrociously mismanaged?
A dangerous symbiotic relationship with Government where both parties were mutually fooled into thinking the enterprise couldn’t fail.
An anti-competitive and arrogantly managed company.
Given that Telent very recently won the contract for NRTS2 from Highways England, then (as the article suggests) a lot of extra work could be coming their way in a relatively short period. Presumably Telent were aware of problems with their partner and have made provision for such an outcome as this.
Or could there be a feeding frenzy with other infrastructure providers hurriedly putting bids together?
“Carillion telent is a separate business holding its own funds and bank accounts. Therefore, the contract with Gigaclear to deliver the build for full fibre broadband to the South West region still stands.”
I don’t quite understand this.
Carillion telent is a joint venture and presumably when the 60% majority party enters liquidation, the joint venture is highly unlikely to continue. Or have I understood this wrong?
I think trying to pass this situation off as being something that will not create problems for the JV is a touch optimistic on Gigaclear’s part. JV’s face some pretty unique and difficult challenges when one of the companies involved kicks the bucket.
No doubt the agreement they have will cover such an eventuality and spell out what happens next, at least that’s the usual way of things. Nevertheless if the debtor is a member to a JV agreement, the debtor’s interest in the JV could still be considered an asset of the bankruptcy estate.
I would assume the JV has kept very separate bank accounts and records of equipment etc. in order to avoid the above risk (this is what Gigaclear is referencing), but no doubt the lawyers involved are going to be kept very busy over the next week+. Sadly we aren’t party to the contract terms and so can only speculate.
@AndyH
If the joint venture is a separate company, then it is indeed wrong to say it will necessarily stops trading if one (or even the major) shareholder goes insolvent. The shareholding in the joint venture would become one of the assets of the insolvent company which the administrator has to deal with.
Of course, it’s often rather more complicated than that. Often the joint venture will have borrowed money from the parent (or parents) rather than direct from the markets. That was the case when Cellnet was set up as a joint venture between BT and Securicor. Almost the entire loan capital was borrowed from BT Group who were able to raise money cheaper. In any event, any such loan from the insolvent parent would be an asset.
Quite what happens here will depend on the joint venture having sufficient working capital to continue operating independently. If Telent’s legal team have done their job properly, then they will have arranged things such that their interests were protected in the event of their partner in the joint venture going insolvent.
Of course it may be that the joint venture has been set up on some other basis, but it doesn’t seem this is the case. However, one thing that may be material is if the joint venture was effectively sub-contracting work to the two owner-partners rather than having its own workforce. In that instance, it will have resourcing issues.
They’ve definitely done a lot of sub-contracting (as opposed to building things themselves), which is part of the reason why they’ve got into this trouble. For example, I think they subcontract out to local civil engineering firms, such as RPO Williams and HT Installations, in Wales.
Reading the relevant part of the Carillion Telent website, it sees they use a lot of local contractors (which I guess is not a bad thing in the circumstances if it means that much of the resource is still available). As far as the roles of these two companies if looks very much as if Telent provides the telecoms know-how, and Carillion the brawn (when it comes to civic works).
The sub-contracting of pretty well everything in the building industry seems to be the norm. When the new Community Centre was built in the town where I now live, the main contractor (Beard) had almost no direct employees in the construction process. It was all sub-contractors. The modern economy seems to have made corporations averse to having large direct workforces (not just companies either – much of the public sector too).
But aren’t the people that work for Ct actually Carillion employees?
I would be very surprised if Telnet could continue the joint venture contracts. Aside from the issue of manpower to meet the contractual deadlines, one of the main benefits of a joint venture is that the synergies of multiple parties leads to significant cost savings. If the JV contracts would not be profitable for Telnet to take them on itself, then it is unlikely to continue them.
As for the issue of the finances of the JV, I imagine that will come out fairly quickly. There will be a lot of analysts in the City going over things with a fine tooth pick because of the impact that Carillion and Carillion telent have on so many contracts.
I do also find it very interesting that BT have yet to make a statement. I would imagine they have been waiting to see the government’s proposals to ensure that certain contracts are to continue, as communications is an essential infrastructure.
Sorry, that should read Telent.
@ Steve
I couldn’t find a company called Carillion telent, or similar. If you go to Page 144 here https://carillionplc-uploads-shared.s3-eu-west-1.amazonaws.com/wp-content/uploads/2017/03/0930AQ-carillion-annual-report-2016-original.pdf there doesn’t appear to be a JV company.
The website http://www.carilliontelent.com is owned by Carillion plc and enquires are to be sent to Carillion.
It’s often damnably difficult to find corporate structure information. On the website, they call themselves a company. There are umpteen press releases around which states the Carillion Telent JV has signed contracts. Contracts can only be signed by a legal entity of course. It might be that Carillion Telent is division of Carillion and Telent is just a junior partner, but it doesn’t read like that. There is another possibility in that I believe in 2001 something called LLPs were introduced (Limited Liability Partnership). Those are a sort of hybrid company/partnership set-up. The terminology is confusing as an LLP isn’t like a normal partnership in that it ceases to exist if one of the partners does. It’s a corporate body in its own right.
Whilst the legislation talks about “persons”, in UK law a company can be a person, and the registration process allows a partner being a corporate entity.
So maybe that’s it. Presumably the ability of such a partnership to continue when one of its members has ceased to exist depends on its viability.
It’s just a possibility.
https://www.gov.uk/government/publications/limited-liability-partnership-registers/limited-liability-partnership-registers#llp-register-of-members
“The information to be delivered for an other registrable person (such as a corporation sole or local authority):
their name;
their principal office;
the legal form of the person and the law by which they’re governed;
the date on which they became a registrable person in relation to the LLP in question; and
the nature of their control over the LLP.
“
The Telent accounts refer to it as a “joint operation”, in which Telent “holds a 40% financial interest in the joint operation and accordingly, 40% of the joint operation’s results, assets and liabilities are included in telent’s financial statements.”
That to me is a pretty opaque statement and would seem to imply that there is no legal entity involved (not even an LLP). If I was Matthew Hare, I would be pretty nervous and would have my lawyers on the case already – which I dare say he has, as he is no fool.
It is quite possible that the invoices are all made out to Carillion plc (in the same way as Openreach invoices always used to be made out to BT plc). Also possible, of course, that although there is no formal legal entity involved, there could well be a formal legal agreement between the two companies that specifies how the JV will operate. If this is sufficiently well thought out then it might be as good as a separate legal entity from where Gigaclear sits.
I would imagine there will be some upcoming clarification about the JV from both Telent and also the administrators of Carillion.
The government has already said it will take on public service contracts, at a cost to the tax payer. The question will be whether the Carillion Telent JV will be able to continue to honour its contracts and or whether the government will intervene. Strictly speaking, the telecoms contracts are not public service contracts, however telecommunications is such a fundamental infrastructure and the government has a vested interest in ensuring there are no knock-on effects to the failure of Carillion.
The other point is, as you and Mark point out, Carillion Telent uses a lot of sub-contractors. The reports today have shown that Carillion owes large amounts of money to sub-contracts, some of whom have stated they will be put out of business if they are not paid. The question will be are these also sub-contractors of Carillion Telent and if so, what will happen to them?
@AndyH
I doubt that there’s any immediate threat to telecoms operations in the UK. There could be a knock-on effect on major programmes though, like BDUK or fulfilling commercial contracts. However, I doubt very much that we’ll see the government doing something drastic like taking the Carillion Telent venture under public ownership. They have enough to do to make sure that services they are directly responsible for, like hospitals and the railways aren’t disrupted.
@WirelessPacman
Any partner in a contract has to be a legal entity (a legal person – which isn’t necessarily a person). It could be that Carillion Telent is simply a division of Carillion and the contract is with that company and some sort of sub-contract arrangement with Telent, but the wording doesn’t seem to fit with that. It seems obvious now it isn’t a joint held company, so my bet is it is some form of LLP. Unfortunately the official information available about any such named entity seems lacking.
Carillion Telent is not a JV vehicle it is described as a joint operation between Carillion PLC and Telent Ltd with the latter having 40% financial interest in the joint results, assets and liabilities – that makes it very hard to unravel and take the contracts on on a sole basis…
Lawyers will be getting rich…
Unless it’s simply part of Carillion, Carillion-Telent has to be some sort of legal entity to be able to enter into contractual arrangements. My bet at the moment is it’s an LLP (which is a sort of corporate/partnership hybrid which was created by legislation passed in 2000). The legislation allows for members to be corporates as well as individuals.
Hopefully, more will appear and that they have the working capital to keep operating. Hopefully it will become clearer.
nb Carillion themselves called it a JV (although I don’t think JV is legally defined in the sense of a corporate body).
https://www.carillionplc.com/news-and-media/carillion-joint-venture-signs-extension-to-framework-agreement-with-openreach-with-a-potential-value-of-up-to-1-5-billion/
Good job Telent on stepping in and taking on all those Carillion workers in the JV.
Probably not that many given apparent amount of subcontracting, but I bet they and their families (as well as the contractors) will have breathed a massive sigh of relief!
There was a news article from July 2017 about an investigation that Openreach were carrying out into the capability of the Carillion Telent JV to fullfil the contract made with OR. It’s hardly definitive of course, but the news article reported
“An initial investigation into the agreement has revealed that delivery of contract would be protected in the event of a Carillion collapse but Openreach is taking a closer look to make sure the project is safe.”
http://www.proactiveinvestors.co.uk/companies/news/181045/carillion-dealt-another-blow-as-bt-s-openreach-investigates-15bn-contract-181045.html
That sounds in line with Gigaclear’s statement. In the case of OR I can imagine there is a maelstrom of meetings going on at the moment with major city investors, Ofcom, OR major customers, the Carillion administrators not to mention legal teams. No doubt an announcement will appear, but I suspect it will be rather carefully worded and somewhat opaque given the number of interested parties.
If the contracts have legs, ie are profitable, the Liquidator would be very interested in a quick sale to secure any kind of value in them.
Any construction related contract such as JCT or similar does have an insolvency provision and the Contract winds up on insolvency. The Contract(s) usually have a performance provision in which the supplier might have to demonstrate that they have sufficient resources (financial and otherwise to deliver) if they don’t there is usually a procedure to terminate.
As there will be few if any assets in Carillion selling off contracts and entities is about all that can be done to raise funds.
This has to be done quickly while the contract is still breathing and the buyer of services OR or whoever hasn’t got cold feet. Might well be OR who buy out Carillion in the short term and reshape the JV and then sell on their stake, to avoid conflict of interest, to a 3rd party within say 12 months.
This way things keep rolling and people get paid.
The last thing anyone needs with things fibre like things ramping up is for a whole load of subcontractors to go belly up and the knowledgeable people, business owners involved, to be wasting their time liquidating their own small operations because they have not been paid. And this is a real risk in these cases.
I speak from experience: we were trying to buy a large competitor in 2010 who went under and we had to support our sub contractors to keep things moving with simple things like moving payments up to 7 days from 28 days and they were very grateful for the gentle assistance. Bought a lot of loyalty.
Lots of speculation of course. The internet fuels it.
The civil engineering industry has always had lots of risk, and consequently lots of failed contractors. It keeps going, since the work has to be done, and paid for. The liquidation seems to assist this process more than a messy receivership.
We seem to have developed an irrational fear (or expectation, for some) that every “disaster” is the end-of-the-world-as-we-know-it, the modern version of the doomsday mentality. Rather it’s pick-up-the-pieces and business as usual. That’s the way the world keeps going, and always has done. And we’re experts at it: it’s the basis of the whole contract industry. One of the few things in which we lead, internationally. It’s in everyone’s interest to minimise the disruption. Apart, of course, from the naysayers, but they’re not in the business, thankfully. Carillion bit off more than they could chew. They weren’t the first, and won’t be the last. We all like to pay as little as we can and get more for less, on the basis it’s worth it although bad things will happen sometimes, but we can cope. The government is no exception. We want security, only as long as someone else pays for it. They don’t, we do. The sheep may safely bleat.
I too would agree that this would be just another business failure if it wasn’t for the government contract issues. The problem isn’t so much the civil engineering side – those contracts will be let out again, albeit possibly at higher cost. The government doesn’t normally pay out in advance, so there shouldn’t be too much public money gone to waste. The biggest issue will be continuity on service contracts as they need to be kept going in the short run.
On the telco side, it looks like that’s rather less under threat.
As far as employees are concerned, then this isn’t exactly comfortable for them, but it looks to me that there still a lot of demand in these sectors and, hopefully, the great majority will get re-employed fairly quickly.
I’d be a bit more concerned for sub-contractors who haven’t been paid. The shareholders will lose pretty well everything of course. Some hedge funds will have made money selling short.
oh – and the state-backed pension failure scheme is going to take a hit, which will probably end up costing firms on the scheme even more if the “premiums” are raised.
Carillion used lots of subcontractors (it had few direct employees only 20k which is not a lot for its size).
And things are not looking good for the subcontractors, many who are owed invoices for 120 days plus.
http://www.bbc.co.uk/news/business-42695661
It’s run by Philip green say no more.
You know that it’s a completely different Philip Green to the BHS one don’t you? They aren’t even related.
No I did not. Just googled the name and that D@#k of a Philip green come up.