Interserve Deal to Dodge Carillion Dilemma

by Brian Bamford

DESPITE a deal with lenders on the principles of a debt for an equity rescue at INTERSERVE, a major shareholder has now called for a general meeting to dethrone several directors at Interserve, a major outsourcing company.    

Last December, Ben Chapman in the Independent, commenting on Interserve, wrote:
'The company has long had a close relationship with government and was a key contractor in post-war construction but it was in the 1990s privatisation and outsourcing boom that it morphed into the diversified beast that it is today.'

Coltrane Master Fund, which holds over 5% in the group, has now called for the general meeting with the aim of removing key directors: Glyn Barker, Mark Whiteling, Russell King, Anne Fahy, Nick Salmon, Gareth Edwards, Dougie Sutherland and Nicholas Pollard.

This is all rather worrying and reminisant of the Carillion melt-down, because a year ago after the collapse of Carillion, Construction Enquirer reported that:

'Beleaguered Interserve had some good news for the City this morning with confirmation of a five-year contract award worth £227m from the Department for Work and Pensions.

'Interserve will provide the DWP estate with mechanical, electrical and building maintenance.

'The company will also provide cleaning, catering, waste disposal, removal and secure destruction of confidential waste services to over 700 buildings throughout the UK, covering over 1.3 million square metres of space.' 

Today, Debbie White, the CEO of Interserve, has said:  'Agreeing the key commercial terms of the deleveraging plan with our lenders, bonding providers and Pension Trustee is a significant step forward in our plans to strengthen the balance sheet.'

White added:  'The board believes that this agreement will secure a strong future for Interserve. 
'This proposal has been achieved following a long period of intensive negotiation and has the support of our financial stakeholders and Government. 
'Its successful implementation is critical to the Interserve group’s future and all of its stakeholders.'

 Watch this space!

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Interserve & the 'living will'

by Brian Bamford

LAST February, the journalist for Forbes magazine Francis Coppola wrote: 

'Interserve is experiencing severe cash flow problems, mainly due to its waste management business on which it has been taking heavy losses for some time.  In 2016, it decided to exit from this business, and it is now taking on no more work in this sector.  But it is still running down a bunch of contracts on which cash outflows are significantly exceeding inflows.  Seeing these contracts through to completion is raising Interserve’s short-term borrowing requirement, forcing it to seek additional funding from banks.'

  

At that time there were suggestions that INTERSERVE may be another Carillion, which had collapsed in January.  Two days ago it was reported that Interserve has agreed to provide the government with a back-up plan or will to avoid a Carillion style carnage in event of it going under.

On Monday, David Lidington, minister for the Cabinet Office, announced that key government suppliers are being asked to draw up so-called 'living wills' to ensure public services continue without severe interruption after company failure.

It is worth noting that Interserve has offices in Tameside and in Rochdale on Livsey Street, where it manages healthcare appointments. 

Lasr week 'Building magazine' reported:  'Worries that Interserve could be facing more losses on another botched energy-from-waste scheme have sent its stock plummeting 30% since Friday.'

Construction Inquirer is now reporting that faced with the current problems a recent plan from Interserve is expected to include a debt for equity swap or rights issue, although the latter would be a challenge after recent share price falls.

Watch this space!

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Dodging the Long Shadow of Carillion

by Brian Bamford

THIS week  Tom Fitzpatrick in Construction News wrote that there are indications of a 'split between those [companies] who are specialists in their field and making a proper [profit] margin, and those who are struggling with fragile balance sheets and highly leveraged business models.'

Of the top 100 contractors it seems that debt is concentrated among the UK's 10 largest building firms, with five of the top ten increasing their borrowing by £100 million or more in their last financial year,

True some of the smaller companies in the top 100 firm are wisely cuting shareholder dividends and shoring up their bank balances by storing extra cash.

This last may well be a response to the tubulance among the bigger firms. Not only Carillion went down, but sinificant building companies such including Lagan Construction Group and Lakesmere experienced financial collapse.

What the Carillion experience showed was that the numbers and figures auditors fed us can be misleading.  Having reported the largest pre-tax profit in the 2017 CN100, Carillion collapsed only months later.
 

Tom Fitzpatrick wrote in Construcion News on the 5th, September, 2018:  
'In a preview of 2018 published last December, I wrote: “Carillion aside, I can see 2018 being difficult for tier ones and would not be surprised to see a high-profile failure or two, perhaps among companies exposed to the commercial sector, or firms with non-UK parent groups shrinking their UK businesses”.'

Mr. Fitzpatrick continues:
'No one wants to see big companies go under. Whether you liked or loathed Carillion and what you’ve heard about their mismanagement on the pages of CN [Construction News], its collapse left a trail of destruction and forced good people out of work, apprenticeships and livelihoods.'

One possible candidate who some thought might go the way of Carillion was Interserve.  On the 17th, January, this year after Carillion went down, a report in the Financial Times revealed that the government is “worried” about Interserve (LSE: IRV) and has assigned a team of officials to monitor the company’s financial situation.

In January this year in the Guardian Neil Wilson, senior market analyst at ETX Capital, said Interserve had had its problems but was 'no Carillion.

He added:  'Comparisons with Carillon are all too easy to make of course – a diverse business operating on thin margins. It has faced pressure from employment and contract mobilisation costs and margin deterioration from a cost base which has not been flexible enough. It’s one of the most heavily shorted FTSE stocks and it has a lot of debt.
'However in the case of Interserve, the arithmetic doesn’t look anything like as bad as Carillion.' 

We'll just have to wait and see if there are any more tears before midnight.  

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