Jim Armitage: Prudence shows Galliford Try is building a future

Galliford shareholders may not feel like it right now, but the collapse of Carillion could be the best thing that ever happened to them.

The death of the grandaddy of contractors has woken the whole industry with a jolt to the sins of the past.

So it is that Galliford today takes the kind of sensible, responsible approach to running a business which Carillion’s chumps so woefully failed to do. Yes, it is hitting shareholders with short-term pain, but the moves will create a business with strong long-term prospects.

Galliford’s troubles stem from its part in a disastrously loss-making Carillion joint venture building a bypass in Aberdeen.

The project was taken on by previous management at a fixed price, on kamikaze terms which meant the contractors took all the risk. It’s worth noting what the project was building: 58km of road, two bridges across the Rivers Dee and Don, a railway bridge and 100 other structures. Four hundred gas, oil, water and other utilities had to be moved out of the way. And all in the dismal weather of the north-east of Scotland. As they say, what could possibly go wrong?

Answer: pretty much everything. The spiralling cost overruns were a large cause of Carillion’s collapse. Galliford is now saddled with its share of the additional costs, plus a chunk of Carillion’s.

However, rather than using Carillion’s approach to managing such problems — piling up debt by trawling the back-streets of the global lending markets — Galliford has been prudent, taken stock and tapped shareholders for cash to cover the shortfall instead.

Rather than continuing paying out dividends as if nothing was wrong, it’s trimming the divi, too.

In fairness to Carillion, Galliford had more options. Most of its work is in smaller projects with decent margins and less potential to go spectacularly wrong.

Unlike Carillion, then, it is a business well worth saving, even at the cost of a rights issue and dividend pain.

But then, if Carillion had bitten the bullet and done the same a few years back, perhaps it, too, could have been saved.

A very painful lesson learned.

If you thought GKN’s chiefs would be more conservative than hostile bidder Melrose, think again.

At every turn in today’s defence plan, GKN’s Anne Stevens goes a step further than the predator’s proposals for her business. Sell the Powder Metallurgy arm fast; split the aero and auto divisions now; return £2.5 billion to shareholders in three years. Compelling stuff.

Melrose can still win, but must offer more shares to GKN investors if it really wants to.