Rok’s spectacular collapse seemed like a bolt from the blue, but in fact it followed in the footsteps of other once admired but now failed big names. What are the warning signs?
’Rok fall” was just one of the inevitable headlines accompanying the death throes of “Britain’s local builder” and possibly the closest the sector ever got to a glamour stock. Although many observers were surprised by the speed of its demise, arguably for years the writing had been on wall.
Rok slid into administration on 8 November with hundreds of millions in financial and trade commitments. Balfour Beatty picked
up significant shreds at what looks a cheap price, but the brand and most of the 3,000-plus staff appear to be doomed.
As has been widely recounted, the building, social housing and maintenance group grew from humble beginnings as a South-west based company called EBC. Reinvented as Rok, branding became central to its ethos, but it went hand in hand with what were some enlightened approaches that stood out in an otherwise unreconstructed construction industry. Rok did not have workers or staff, it had “citizens of Rok”.
The cliches such as “’oo put this in, luv?” were drummed out of workers at “Rok schools”.
Snook and Martin were known to step up to the mike at normally anodyne investment conferences to the strains of Status Quo’s Rockin’ All Over the World.
Sales reached £600m and market capitalisation peaked at £440m. But the suspicion for years among rivals and a spattering of investors was just how much of the seemingly unique business model was substance rather than style.
Rok’s rise and fall had parallels with those of Connaught, Jarvis, Amey and others in the past decade or so, which have either gone fully into administration or forced sales to rivals. These and others have arguably exhibited some or all of the following basic and often inter-connected traits:
- Larger-than-life chief executive
At the helm of the most over-reaching firms there usually sits a CEO described variously as charismatic, entrepreneurial or, most ominously, indispensable. On the way down they are often the last to accept the magnitude of problems and can be nigh impossible to dislodge until too late. In contrast Balfour Beatty’s Ian Tyler could be described as reassuringly dull.
- Unique business model
Warning bells should ring when directors claim their margins can remain significantly ahead of the opposition or that their businesses can survive economic cycles unscathed. “Basically, we’re recession proof” a wide-eyed Rok director once confided in me.
Jarvis, Connaught and Amey all reported well above average margins, explaining this on their businesses simply being “better”.
- Insufficient financial controls
Often back office control fails to keep up when companies go through high growth rates.This was the case several years ago when Rok’s response maintenance division was growing. At Connaught, among other revelations in the aftermath of its failure was the reported discovery of 50,000 supplier invoices that had been unaccounted for.
- Corporate avarice
All major businesses have involved acquisitions but the age old accounting trick of ignoring “goodwill” has led to more aggressive groups buying suspect firms, in unrelated sectors at questionable prices but in deals argued to be “earnings accretive”.
- Cash stops being king
One consequence of all the above is cashflow can be erratic or difficult to reconcile with reported profits. Connaught was the subject of scrutiny by more astute analysts prior to its collapse, with the capitalisation of mobilisation costs being an area of concern. (Subsequent revelations suggest this may have only been the tip of the iceberg.) Consistent net cash balances are always the best insurance against the unexpected.
- Unprepared for the unexpected
“Unexpected” external events are often blamed for accelerating the inevitable. For Jarvis, which failed in March, it was delayed work from its dominant client, Network Rail. For “recession-proof” Rok, it was a prolonged winter and, err, the recession. The final straw is invariably trade creditors going from a stance of accepting slow payments to not working unless cash is paid upfront - precipitating a massive cash outflow.
As the industry gets increasingly consolidated, the survivors are those groups that observe the converse of this check list. There don’t appear to be many companies left in the construction and support services that comply with the danger list, but my suspicions are there could be one or two.
Watch this space.
Alastair Stewart is a construction and housebuilding analyst