Collapse of building firm highlights risk of buying ‘very British’ shares

Viewed from the office of a Parisian asset manager — the collapse of

Viewed from the office of a Parisian asset manager — the collapse of Carillion the failed UK building services giant which holds scores of contracts from the British government — are early signs of the pain Brexit is expected to bring and another reason to stay underweight on British shares.

“For all ‘very British’, British companies”, that are almost entirely exposed to the UK economy, “one can see that there is an issue with faltering sales”, said Olivier de Berranger, who heads the asset management unit at France’s La Financière de l’Echiquier.

“Markets pay little attention to Brexit but there are worrying signs like the bankruptcy of Carillion or the decrease in traffic at Eurotunnel”, de Berranger said.

It comes as shares in British contractor Interserve also plunged after a report that the UK government was monitoring the company. Interserve is a competitor of Carillion.

The Financial Times has reported that ministers were very worried about Interserve, a major player in the UK outsourcing industry, and also running scores of construction and services contracts for the government and other bodies.

The UK government said it monitored the health of all its suppliers but it did not believe that any of them were comparable to Carillion.

Interserve shares, which have seen short interest rise in recent months, fell up to 15% but recouped most of the losses after the UK statement and were down 2%.

“Ministers are very worried about Interserve,” said one official, according to the FT report, which said that civil servants were monitoring the firm after a profit warning last September.

A spokeswoman for the UK’s Cabinet Office played down the report.

“We monitor the financial health of all of our strategic suppliers, including Interserve.

“We are in regular discussions with all these companies regarding their financial position,” she said.

We do not believe that any of our strategic suppliers are in a comparable position to Carillion.”

Interserve, which employs around 80,000 people worldwide, said that it was updating the UK government on the company’s progress with its turnaround plan.

“We continue to have constructive discussions with lenders over longer-term funding,” a spokesman for the company said.

Sector peer Carillion entered liquidation this week and many of the UK’s service providers have struggled after taking on work at low prices for long-running fixed-rate contracts following the financial crisis.

Capita and Mitie, as well as Interserve, have all faced problems from these contracts. Interserve warned of lower annual earnings in September, sending shares crashing by more than 50%.

Another profit warning followed in October.

However, a week ago, Interserve said 2018 operating profit would be ahead of forecasts, sending shares to their highest since the September profit warning. The spokesman for Interserve said that last week’s update remained the position.

Meanwhile, trade unions said the UK needs to allow more time for firms to take on 8,500 workers whose jobs are threatened by the demise of Carillion

The UK government has said it will only pay Carillion workers on private sector contracts for 48 hours after the infrastructure firm’s fall and not offer them the same protection as those in the public sector.

The head of the UK’s GMB union, who met UK business minister Greg Clark earlier this week, said the British government needed to allow more time for the 8,500 workers it estimates are now vulnerable.

“We want those other private sector companies to take on those workers ... That takes time,” GMB

general secretary Tim Roache said.

Over 90% of Carillion’s private sector service customers have said they will provide funding for now, to allow the company’s official receiver to retain employees on those contracts, the UK Insolvency Service has said.

The service also revealed that bonus payments, including those included in severance packages for former executives, had been halted after the firm went into liquidation on Monday.

The company’s interim chief executive has revealed Carillion had just £29m in cash by the time it went bust, at a time when it was struggling under £900m of debt and a £587m pension deficit.

Reuters

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