The Collapse of Killian

Jul 12, 2024

Lecture Notes: The Collapse of Killian

Overview

  • Killian: Second largest construction company in the UK until 2018
  • Failed due to: Poor risk management, financial mismanagement, and aggressive accounting policies

Background of Killian

  • Founded: 1999, spun off from Tarmac (a de-merger)
  • Location: Wolverhampton, UK
  • Growth: Consistently increasing dividends year on year
  • Contracts: Held over 420 public contracts including hospitals, schools, and care homes

Trouble Signs

  • 2015: UBS signals high undisclosed debt levels
  • 2017: Announced a loss of £842 million on contracts, resulting in a 70% drop in share price
  • External Auditor: KPMG supported Killian's accounts, declaring it a going concern despite issues

Reasons for Collapse

Rising Debt

  • 2009: £200 million in total debt
  • 2018: £1.3 billion in total debt
  • Method: Heavy use of supply chain financing, specifically reverse factoring
    • Payments to third parties on behalf of suppliers were not included in total debt

Ill-Timed Acquisitions

  • Eaga: Acquired for £300 million, specialized in low-carbon construction
    • Failed due to government subsidy cuts during a financial crisis
    • £300 million value had to be written off
  • Loan-to-Asset Ratio: Loans increased dramatically; assets stagnated

Poor Risk Management

  • Bidding Strategy: Underbid contracts and hope for no issues
    • Example: Royal Liverpool Hospital contract
      • Initially had the third most competitive bid
      • Revised bid to undercut competition by £36 million
      • Issues with structural integrity and asbestos led to huge costs
      • Resulted in a disparity of £53.9 million

Aggressive Accounting Policies

  • Revenue Recognition: KPMG recommended recognizing revenue when contracts were signed
    • Problem: Overestimated revenue and underestimated costs
    • 2017 Adjustment: £842 million adjustment due to misestimations

Impact of Collapse

  • January 2018: Company went into compulsory liquidation
  • Affected: 420 public contracts, 30,000 suppliers, and 20,000 jobs
  • Government: Had to step in to manage repercussions but didn't prop up Killian due to high debt

Conclusion

  • Killian's failure was a mix of debt mismanagement, poor strategic decisions, and aggressive accounting.
  • The collapse had wide-reaching implications on jobs, public contracts, and the UK economy.

Additional Notes

  • Video mentions many more financial scandals to be uncovered.

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