An outsourcer that expanded beyond its contracting roots – the parallels between Interserve and Carillion are inescapable, but they do not explain everything

chloe mcculloch black

How did it come to Friday’s stark choice for Interserve’s shareholders? Either vote for the bosses’ debt-for-equity rescue plan and retain ownership of not very much, or vote it down and lose everything as the company is forced into administration. Not much of a choice, you might say, but major shareholder Coltrane is adamant its alternative plan is better and so the prospect of a revolt has become a real one. Of course, depending on when you read this you will know which way shareholders have jumped – and if company executives can breathe a sigh of relief or will have to spend their weekend triggering a pre-pack for Monday.

Whichever way the vote pans out, it is undeniable that this once proud FTSE 250 company finds itself in a real mess

The only deal on the table at the end of this week (where have we heard that phrase before?), barring rumoured last-ditch efforts to win over shareholders by further increasing the amount of equity handed to them, is Interserve’s proposal, which involves writing down £435m of debt in exchange for 95% of the firm going to its lenders with just 5% kept by shareholders. And remember this is an improvement on the original package that proposed just 2.5% to shareholders. 

Coltrane, which owns a 27% stake in the contractor, wants creditors to take just 55% of equity in Interserve in exchange for writing down £435m of its debt. Shareholders would keep a 7.5% stake, with further equity created through a rights issue.

But Interserve management says its swift rejection of this alternative plan means that effectively it is dead in the water. Chief executive Debbie White and chairman Glyn Barker made that point very clear in rare press interviews at the weekend when they came out batting hard for their vision of the future. Much the same message has been rammed home by the company’s own Google ad which comes up when you search the term “Interserve”. In bold it states: “It is the only plan today that is capable of being implemented, preserving some value for shareholders.”

Barker in his Sunday Telegraph interview was at pains to stress Interserve’s fragility, warning that a shareholder revolt would immediately trigger a £66m loan to be called in, which the company wouldn’t be able to repay because its cash reserves are so low. White in the Sunday Times outlined the sequence of events if the vote doesn’t go her way – accounting firm EY is on standby as administrator, and staff and contracts would transfer to a new trading entity as of Monday.

But whichever way the vote pans out, it is undeniable that this once proud FTSE 250 company finds itself in a real mess. And what a precipitous fall it has been. In 2014 Interserve could boast a net asset value of close to £500m, had splashed out £250m buying up Rentokil’s FM business and had a share price of over 700p. Today it is worth a mere £22m and is saddled with £631m of crippling debt – hence the need for a deleveraging plan.

If you’re a contractor with a weak balance sheet these days, you’re going to find it hard to convince clients to give you work, and so the cycle of decline sets in – Interserve admitted as much in its results last month when it said its construction arm was struggling to win work due to the group’s financial position. Morgan Sindall’s John Morgan is at the opposite end of the spectrum: sitting on a healthy balance sheet, he clearly sees this as a calling card for more work. For Interserve, however, its debt problem is now so big it has to be tackled head on.

So the question arises, are Interserve’s woes just a symptom of a broken outsourcing model or did a set of business decisions lead to its current unravelling? Carillion’s collapse has undoubtedly had a huge impact, an outsourcing giant with a massive debt pile that went down while working on a whole range of public sector contracts that overnight were left in the lurch. And the implosion has only made life harder for others burdened with debt, such as Interserve, as lenders tighten the screws and short-sellers take aim.

But White is surprisingly frank about Interserve’s own mistakes or at least those made by previous managers relating to the decision to enter the energy-from-waste market, saying: “Rather than just take construction risk, they [Interserve] also took process risk. Interserve did not know anything about those processes. We did not have the expertise.”

She doesn’t mention him by name, but this is a clear dig at Adrian Ringrose, who came in as chief executive aged just 36 and launched the disastrous expansion into the energy-from-waste sector where problem contracts have since blown a £230m hole in the company accounts. One comment from White sticks out: “In low-margin businesses you have to stick to your knitting. Your risk-reward profile has to be managed carefully.” Under previous management clearly the view was the opposite – the emphasis was on expansion, while venturing into new territory was seen as an opportunity to boost low margins and so it seems the risks were overlooked.

An outsourcer that expanded beyond its contracting roots – the parallels between Interserve and Carillion are inescapable, but they do not explain everything. Interserve has its own reasons for the indebted situation it is in, and we’ll have to see how it gets itself out. But shareholders will be aware that unlike another meaningful vote we can think of, they’ll only get one chance.

Chloë McCulloch, editor, Building