When Britain’s fastest growing consultant began to fall apart, the firms it bought had to find a way to avoid sharing its fate. For seven months they fought a hidden war to save their lives. Sarah Richardson found out how six of them pulled it off
Erinaceous bought QS Francis Graves & Naismiths for £7m back in September 2005. Richard Graves, the son of the founder, was called by the Birmingham Post for a comment. “It’s good news,” he said. “We’re looking forward with optimism.” If he knew what kind of future was coming down the line, he’d probably have wept.
Two years later, after buying many more firms, Erinaceous began its long, ugly slide into dereliction, accompanied by month after month of ever more desperate stories about financial losses, fraud investigations and profit warnings. Graves fielded the fretful calls from his clients and he stuck it out. He coped with the departures of Neil Bellis and Lucy Cummings, the company’s founders, and he coped with the arrival of Nigel Turnbull, a businessman with a background in risk management, to overhaul the business.
In the event, his decision to go was taken after waking one bleak winter morning to the knowledge that he was about to spend another 12 hours battling to keep his firm out of the clutches of managers who seemed to have no plan for its survival. “I’d been trying to stay inside to keep a grip on what was going on,” he says, “but by January, I just couldn’t swallow my pride any more. I picked my ball up and I went home.”
Graves resigned from Erinaceous there and then, but it took another three-and-a-half months to plan and execute the buy-back of his firm. In the event this was carried out with a speed that surprised many, particularly after Erinaceous went into administration on 14 April. The assumption had been that the small subsidiaries would be abandoned by its parent’s banks, and would probably suffer a similar fate.
Graves was not alone. Five other firms in Erinaceous’ property consultancy division, Monaghans, Leach Rhodes Walker, John Nolan Associates, part of Dearle & Henderson and Rose Project Services, also tunnelled their way to freedom. Those escapes were all completed within days, and their success was testament to their long and careful planning, which was begun long before the extent of Erinaceous’ problems became public.
What follows is the inside story of those last desperate months, the financial scandal that trapped some of them in the first place, the extravagant rewards offered to individuals to stay within the group, the secret four-way battle for control of the companies and the clandestine war they fought to survive.
Edging towards the door
Within hours of Erinaceous entering administration, its lenders, led by HBOS, snapped off its profitable insurance arm and made moves to acquire its residential management and property maintenance divisions. But they showed no interest in the seven small property services companies, many of which had low profitability and few assets. Immediately after the collapse, investors were posting predictions about their impending closure on the internet.
What they didn’t know was that several of those firms had been making subtle moves to prepare for escape since the autumn, when the company was insisting that a strategic review would turn the business around.
Companies House records show that the managers of Francis Graves, John Nolan Associates and Rose Project Services set up shell companies between November and April, when Erinaceous went under. They were called similar names to the trading entities (the Graves Partnership, Nolan Associates and Rose Consulting Ltd) and were intended to provide a vehicle for the eventual buyouts, as well as preserving the names of the firms.
Rose and Nolan launched their companies on the same day, which was not a coincidence. All the building services firms had a common enemy, and were not shy about discussing their escape strategies. “It was like being stuck in an elevator – you all pull together,” said one manager.
John Nolan, chairman of Nolan Associates, describes the dormant company he set up on 26 November as a “precautionary measure”, although he adds that he was anticipating the need to use it. “I wanted to know that, in the worst situation, which is eventually what happened, we could keep the name.”
Nolan established this company shortly after wholesale board changes in Erinaceous, including the departure of Bellis and Cummings, the company’s founders, and the appointment of Tim Redburn, a turnaround specialist. Although this was presented as a new start, Nolan says it was a crucial factor in his decision to bale out. “When several board members are removed and new ones installed, the situation isn’t all roses. There’s a risk: one, that the company might not survive, and two, that it might divest itself of its subsidiaries. I did what I had to do to protect the 50 jobs in my division.”
On the skids
This is not to say that Bellis and Cummings were mourned when they left. A senior manager at one of the seven firms, who did not wish to be named, said his thoughts turned to escape routes after the duo assumed more personal control.
“They directed the company by diktat,” he says. “Particularly Cummings. What she said went, and often without discussion. And there were stupid decisions being made – like centralising the accounts, which on top of everything resulted in massive inefficiencies in administration.”
Richard Graves says the smaller companies faced a continual battle to fend off Erinaceous’ bosses. He says: “While the hedgehog [Erinaceous' logo] crept on to the bottom of letterheads, the businesses clung to their historic ideals. The staff looked to people like me for comfort and all we could do was keep telling them we hadn’t changed. But morale was bloody awful.”
What happened after 24 September, when the company admitted that it was in breach of its banking covenants, is well documented, and included the thrashing around customary in such circumstances (see timeline overleaf for a potted version).
To add to the jollity in this instance, Erinaceous became embroiled in accusations of fraud. Its Dunlop Heywoods subsidiary had been implicated in a property valuation scandal back in 2006, and in February another set of accusations were made in Kent. Medway council accused the firm of charging for work not done or not completed. The council’s auditor and an external accountant carried out an investigation, and it is understood that they are questioning £1.8m of maintenance work over a year-long period. The council is now withholding payment to Erinaceous in expectation of a claim. It is also understood that some councillors are demanding a police inquiry.
‘Our clients had a lot of concerns’
As the problems increased, so did calls from anxious clients. Thanks to the strategic failure of Erinaceous’ drive to turn itself into an integrated one-stop shop for all of a client’s property needs, most of the property services firms operated with autonomy.
Erinaceous felt like Frankie Howerd, it just wouldn’t die. But now it has – and I’m enjoying the sunshine
And this played a large part in saving their hides. “Our clients had lots of concerns,” says one source. “They relied on personal assurances that in one shape or another, our team would continue.”
Nolan agrees. “We’ve been absolutely privileged that our clients had strong personal loyalties to the directors and staff. When the bad news started to come out, they had to trust us to carry on.”
Even with client pressure to get out and with vehicles in place for a buyout, the companies were unable to break free. For some, including John Nolan Associates, this was because Erinaceous had not paid all the money promised during the £12.6m takeover it carried out in November 2006.
Nolan says: “Erinaceous still owed me money from the deal; they had been promising it and never giving it.” He declines to say exactly how much that was, but says it came to “millions of pounds in loan notes”.
Another deterrent was that the interim management that took over from Bellis and Cummings introduced lucrative “retention bonuses” to persuade key staff to stay while it worked out what to do with the company. These were introduced in October and amounted to about 20% of an individual’s salary, which they would receive if they agreed to remain until March.
“It was made known to myself and to others in about October,” says Graves.
“Each of the business leaders were asked to nominate key individuals who would get the bonus if they stayed.”
Graves knows the attraction of this kind of offer. Although he guessed “the writing was on the wall” since September, he still took the bonus. In the end, pride proved the stronger impulse, and he resigned “whatever it meant for the money”.
Another reason why it was hard for firms to break away while Erinaceous was still trading was that its management was determined to keep its options open, despite offering the firms no guarantees for their future. The view was that it was worth more as a wholesale business, either for a sale or as a core business within Erinaceous.
This was certainly the impression given to Graves when he approached Erinaceous to ask about a buyout earlier this year. “After I resigned I put an offer in, which was refused, although talks did carry on. I think that the plan was to sell the insurance business, then draw breath with the banks, then review what was left. In three to five years, the profitability of the division might have been enough to cope with the debt.”
Of course, not everyone was happy with this wait-and-see tactic, and a four-way struggle for control of the division ensued between Erinaceous, the companies that were preparing their buyouts, and two suitors interested in buying the division as a whole. One of them is understood to have been an Erinaceous manager. The other was Graves himself, who by this stage was on gardening leave. “I was obliged not to speak to people, but this didn’t mean they couldn’t speak to me,” he says.
He went far enough with his plans to approach a venture capitalist for backing, but received a shock. The sum Graves would need was less than the investor’s minimum lend, meaning he would have too much money in his pocket. He asked what he should do with the surplus. “They said they wanted me to go out and buy other businesses. It seemed cockeyed. Serial acquisition, as Erinaceous showed, is madness.”
As Erinaceous moved closer to collapse, its management moved closer to a deal on the buyouts. Graves and Nolan were in advanced discussions by the time the company fell: Graves was in his lawyer’s office discussing terms on 14 April.
The collapse provided the catalyst the firms needed. Within the following two days, all apart from Dearle & Henderson had negotiated buyouts from administrator KPMG. Dearle & Henderson, which itself had been on the verge of administration when it was bought by Erinaceous in March 2007, was split into three: the Scottish office, under managing director David Fisher, carried out a buyout, the Birmingham office was bought by Graves, and the London office was closed.
On the face of it, Dearle & Henderson was the only firm to have suffered significantly as a result of the administration. It is thought that about 100 jobs were lost, although the London office has since been split into teams, and senior staff have joined EC Harris and Gardiner & Theobald.
“Dearle & Henderson lost its leadership under Erinaceous; it was a rudderless ship,” says a source close to the company. “It was too big to come out as a single company, and it had a lot of low margin work.”
In fact, when the talks were held in April, firms found the figures discussed were a fraction of what Erinaceous had paid for them, which provided some compensation for the months of strife. But then came the last little booby trap: the descent into administration, and a whole new set of negotiations with KPMG.
“Our deal had been scheduled to complete on the Friday before Erinaceous went into administration, but then it was killed. We got a massively worse deal, and I had to take a hit to my personal finances,” says Nolan. Another firm was more sanguine: it bought itself for 3% of the price it had sold itself for.
Like Nolan, Graves shudders at the memory of those hours. “Erinaceous had felt a bit like Frankie Howerd, it just wouldn’t die,” he says. “But now it has – and I’m enjoying the sunshine. I’m also available as a consultant to anyone who wants to know why they should never sell their business.” It’s unlikely any of the firms who managed to survive Erinaceous will need to ask.
22 August 2007 The company announces that talks with HBOS over a 300p a share takeover have broken down.
24 September It reveals that it is in breach of its banking covenants.
27 September It reports pre-tax loss of £3.9m for six months to 30 June. Shortly thereafter chief executive Neil Bellis becomes deputy chairman, and non-executive chairman Nigel Turnbull becomes executive chairman.
16 October Finance director Michael Pearson is replaced by Dominic Lavelle.
1 November Restructuring expert Tim Redburn is appointed interim chief executive.
20 November Neil Bellis and Lucy Cummings resign, receiving £736,000 in pay-offs.
14 November Graves Partnership is set up as shell company by Richard Graves.
26 November Nolan Associates is set up as a shell company by the management of John Nolan. Rose Consulting is set up by Rose Project Services.
7 February Nigel Turnbull resigns as chairman and is replaced by Lord Razzall.
25 March The stock exchange is told the company’s shares are virtually worthless.
14 April KPMG is appointed administrator. Shares are suspended at 1.65p.
23 April KPMG confirms the sale of six building consultancy firms, adding to the sale of insurance, property maintenance and residential management divisions.