Carillion liquidation creates Openreach headache

UK headlines have been dominated by the compulsory liquidation of construction group Carillion, a company that holds pretty significant contracts with fixed-line infrastructure provider Openreach.

12 months ago the share price stood at £236, but following three profit warnings the decline was extraordinary. The Financial Conduct Authority has temporarily suspended the Carillion listing following the compulsory liquidation announcement, with the share price at £14. One company that will be slightly worried with such developments will be Openreach.

While telecommunications seems to make up a small percentage of the overall Carillion workload, there are a few significant contracts. Carillion Telent, a joint-venture, has been working with Openreach since 2008, and most recently signed an extension of this relationship through to at least 2021.

The framework was expected to deliver £900 million of revenue over three years, Carillion would collect £500 million as part of the JV, while there was an extension clause included (dependent on performance) for an additional two years, worth another £600 million. The contact was for the maintenance, extension and repair of the telephone and data network in the North East, Midlands & Wales, South West and London & North Home Counties of England.

Openreach is already facing pressure to ensure communications infrastructure is adequate for the digital economy, while also reaching not spots around the UK; having a major supplier go through such a turbulent time will certainly be an unneeded distraction.

Openreach did not have a statement at the time of writing, but has promised one soon. While this might be the largest contract in the telco space, it certainly isn’t the only one. Rural broadband specialist Gigaclear also has a contract in place with Carillion Telent, as does The Defence Infrastructure Organisation.

As part of the Gigaclear contract, Carillion Telent was to assist the rollout of ultrafast full fibre broadband to more than 80,000 properties in some of the most rural parts of Devon and Somerset. The work was supposed to be completed by the end of 2019, but who knows where this stands now.

With The Defence Infrastructure Organisation, an operating arm of the Ministry of Defence, Carillion was awarded a contract to design and build a new communications facility in Cyprus. The project, expected to be completed by the end of January 2019, was worth in the region of £90 million.

The future of the business is unknown for the moment, though it would hardly surprise anyone in the UK if there was a government bailout. While it would be a deeply unpopular move, creditors have refused to budge unless there is government intervention, and considering the number of public sector contracts which are in place, denying a bailout could be disastrous.

As mentioned before, telecommunications is a relatively small area for Carillion, but perhaps £2 billion in contracts awarded to the construction firm after the profit warning will grab government attention. Some of the more high-profile contracts in place include £1.4 billion to build the HS2 rail-line, facilities management of more than 900 school buildings nationwide, while also maintaining 50,000 homes for the Ministry of Defence.

Update 15/01/2018 16:15 – we received the following statement from an Openreach spokesperson:

“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.”

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