Curzon was a fit-out contractor that had formed long-term relationships with blue-chip clients, was making a good and growing profit and was looking to double its turnover in a tricky market. So why on 7 March this year did its bank call in the receiver?
At 10 am on 7 March this year, Curzon Group chief executive David Freeborn received the phone call he had been dreading. His company's bank, Lloyds TSB, told him it would be pulling the plug on the fit-out contractor because of its volatile overdraft. Freeborn was horrified: his initial thought was that six years of work had gone down the drain. The receiver, Ernst & Young, arrived later that morning and in the afternoon Freeborn had to tell staff that it was unlikely they would be in their jobs by the end of the week.
The fit-out sector has been littered with casualties in recent years; Benson, Spectrum Projects and Bellwater all collapsed in late 2004 and early 2005 (see the box on page 53). But Curzon's story is particularly unusual because it was not plagued by the same management problems that had undone others. Rather, the company was brought down by a series of unfortunate events at a time when it was arguably at its most successful.
However, when the company collapsed, it owed Lloyds an estimated £11m. It got into this position because of problem contracts in Dundee and Brighton and delays to a large British Telecom deal. Even in its dying days a financial package, which included the backing of a venture capitalist, might have saved the company, but was scuppered by the last-minute change of heart of a bondsman in the Isle of Man. In many ways, it is a story that reflects the financial tightrope that contractors walk in a low-margin industry.
The story starts in 1999, when David Freeborn left Jarvis, the contractor that had become hugely successful in the rail market. While he was a director there, he had spied potential in Jarvis Newman, a joinery subsidiary based in Billingham in the North-east. It was struggling because it was unable to attract enough high-quality managers to the area, and Jarvis wanted to get rid of it. Freeborn and Simon Charlick, his colleague, duly obliged and bought the business for £20.5m. The company later changed its name to Curzon Interiors to distance itself from its old owner, which had ran into problems after the Potters Bar derailment and delays on its PFI schools contracts. As it turned out, Jarvis is now an almost debt-free business enjoying a renaissance, whereas Curzon is no more.
Backed by venture capitalist Lloyds Development Capital and the firm's more famous banking arm, Curzon's plan was to follow a "buy and build" strategy. First, it would build up its existing business by growing its fit-out frameworks. Last year it finally achieved its goal of seven framework contracts and by that time had got rid of the joinery plant. Then, as it built up the frameworks, it would buy complementary businesses that would introduce it to new clients - in effect, they could trade off each other. Facilities manager TCL Granby had a quality client in BT, and so Curzon bought the £16m-turnover company in 2001. The following year Curzon bought Task Systems, an office furniture company that had many blue-chip clients. Business was looking up.
In its November 2002 results, Curzon posted a pre-tax profit of £1.7m in the year to 31 July, a rise of 28%; turnover rose 48% to £58m and Freeborn talked raising that to £100m in the following year. Freeborn is proud of this period: "We were very successful in the first couple of years," he says.
Success can be a dangerous thing for a new business, as Freeborn acknowledges. In Curzon's case it tempted the management to expand too quickly, thereby changing from a company with little debt on its books to one burdened with it. "We were encouraged - all of us, including the bank - to buy and build, but it made us highly geared. When we had a problem, it meant that we had less fat on our back to cope with it."
The two problem contracts
The attacks on the World Trade Centre did not help. This has been used by too many faltering businesses as an excuse for their difficulties, but in the fit-out market this is legitimate. These companies often rely on hotel and office contracts and both these sectors cancelled jobs after the attack - the hotels when they saw tourism fall off, the commercial clients when they began to fear an economic downturn and accordingly shelved plans to spruce up their offices.
Still, 9/11 did not hurt Curzon as badly as initially feared, as its 2002 pre-tax profit increase demonstrates. Deeper wounds were inflicted by contracts at opposite ends of the UK.
In 2004 a Channel Islands-based company, P4 Property Holdings, hired Curzon Interiors to convert a jute mill in Dundee into 120,000 ft2 of office space. "There were an enormous number of variations," says one source close to the project. It led to the £6.5m contract being heavily delayed and the client disputing the extra costs. At adjudication the following year, Curzon was awarded a six-month retrospective contract extension. That is, it could not be penalised by the client for completing the project late. However, Curzon was not awarded the £2m in fees that the client had refused to pay after the dispute began. P4 then went into receivership before any of this money could be recovered; when Curzon went under, it was pursuing an adjudication with a bank that had provided a guarantee for P4.
The following year Curzon bought Track Systems. Business was looking up ...
If Dundee was bad, Brighton was worse. Richmond Terrace was the conversion of a technical school into a block of flats for developer London Town, which later sold the project to Capital City Developments. This cost Curzon at least twice as much as it had lost on Dundee: one project source described it as "one of the biggest losses that I've ever seen" and claims that he "wanted to abandon the job before it was completed".
Because the drawings were unclear, Curzon had to make 1400 requests for information on the scheme. Essentially, the floor space the client wanted could not be fitted into the building. For example, the staircase would have had to have been removed to accommodate the extra square footage. The requests caused delays, and between 600 and 700 variations had to be made. Curzon went to adjudication five times between 2003 and 2005, and again it won time extensions, but once more money was the problem. Only one of these five adjudications yielded Curzon any cash - understood to be around £250,000 - the rest just granted time extensions.
Curzon claimed that it was the poor initial designs that had led to variations and delays and that these had cost it money. But proving it was an impossible task. "In the end, you get to the point that the legal costs of pursuing the cash and the time it takes from management mean that you're better off just running the business," says one Curzon source.
A spokesperson for Ernst & Young says: "Curzon Interiors lost money on two contracts that ultimately caused a liquidity crisis in the group." When asked why the receiver has so far failed to novate the contracts that Curzon ran, the spokesperson hints that the company might have underbid its work: "The contracts are not attractive to other contractors. There is a lack of inherent profitability."
Although this lack of profitability suggests poor management, people who have worked with the company insist they did their job properly, even agreeing to salary sacrifices while the company was chasing money for the two contracts. Indeed, Curzon had written off part of the losses on those contracts in 2004, and would have completed the write-off in its 2005 results.
One former Curzon manager goes further, saying that Ernst & Young's claims are "absolute bollocks". The source insists that the contracts could not be novated because they were frameworks. Rather than sell them on, the client would just transfer Curzon's work to other contractors on the framework.
Having got through the worst of the problems, the danger for Curzon became the lack of working capital - the Dundee and Brighton contracts had drained the group dry. Any further problems would lead to a cash flow crisis.
But the future looked reasonably rosy. Curzon Interiors' turnover had been static at £40m a year since it had been bought out as Jarvis Newman in 2000. In 2006, it was projected to reach £70m, and this would have been the first year of real growth for the interiors division. The growth was to be fuelled by a big framework win - Curzon, Mansell, Interserve and Kier were picked in early summer last year for BT's 21st Century Network upgrade programme. The firms would share £250m of work in 2006 and much more in the following three years. Enough to bail out Curzon.
Unfortunately, the programme took longer than expected to get off the ground - Curzon first expected money in the fourth quarter last year. Ignoring preparatory works, the real contracting probably won't begin until later this month or next. In fact, the preparatory work such as design and enabling work such as strip-out was understood to have cost the company £2-3m and it was not due to be paid until later this year.
The last straw for Lloyds came the evening before it called in the receiver. With growing turnover in Curzon Interiors, and TCL Granby and Task Systems both profitable, the managers had come up with a financial package to salvage the group. This involved some of the managers' own money and a venture capitalist that had been lined up in the past few weeks to buy the company from Lloyds. "The last piece of the jigsaw", as one of those involved describes it, was the bondsman.
The danger for Curzon became lack of working capital – the Dundee and Brighton contracts had drained it dry
Based in the Isle of Man, the bondsman essentially underwrote some of Curzon's projects such as the £29m Intercontinental Hotel contract in Park Lane (see box, above left). On either 2 or 3 March, the bondsman agreed to put up £2m to guarantee the overdraft, which would buy Curzon enough time for the BT money to come through. Over the weekend, the bondsman changed his mind for reasons that are unknown. What is known is that with this latest guarantee the bondsman would have been risking up to £5.5m of his company's money, including about £3.5m for the contracts he had already underwritten.
Freeborn is said to have been wary of the bondsman throughout these few days. He says: "Any deal isn't done until the ink is on the paper. We thought that we had a deal, but it didn't get signed."
Without the guarantee, the financial package collapsed. Lloyds decided to cut its losses rather than hope that another deal could be put together quickly. Freeborn is strangely understanding of this decision, accepting that a bank owed £11m and looking at its client's round of disasters would surely have had enough. But a source close to the management describes the bank's decision as "crazy". Even without the BT cash, Curzon was projecting a £50m turnover this year - it was still a growing business.
Ernst & Young decided on 9 March that 86 of the 114 staff at Curzon Interiors were to be made redundant, and they left the following day. As they were profitable, TCL Granby and Task Systems continued to trade. The former was later bought by rival Crispin & Borst, a subsidiary of French giant Vinci, and the latter has recently completed a management buyout, supported by Lloyds.
It has obviously been traumatic for the managers of these companies. Tony Daltrey, the joint managing director of Task, says he was "totally surprised" by the bank's decision to foreclose on Curzon. He says that being located in a different building, Task had little contact with its parent.
Terry Dunne, managing director of TCL Granby, does not even want to talk about it. Asked to comment for this article, he said: "I've been through an awful lot in the past few weeks. Can you just let me get on with my life, please?"
A creditors meeting will follow in the next two months, at which the little money that is left may be doled out to subcontractors, who are owed an estimated £3m for work carried out. However, as the main secured creditor, Lloyds will probably receive the bulk of what money is left.
Although there are those who have refused to be critical of Curzon management, some of the specialists take an opposite view. Building services firm Piggott & Whitmore worked for Curzon on several frameworks, including the BT contract and the Royal Bank of Scotland. Managing director Alex Kirkwood says that Curzon never paid his company on time, and that some payments were more than 90 days past the due date.
In February, Kirkwood and his operations director John Podger went to see Simon Charlick, Curzon's finance director, to get a cheque for some of the work their company had done. In the middle of that month, Curzon offered Kirkwood a parent company guarantee for Piggott & Whitmore's work - which was of little worth just a few weeks later. Kirkwood says his company has been able to take the hit on its contracts with Curzon, but he is still fuming: "We have survived it, but no thanks to them. We've traded since 1897 and we've never experienced this before."
Criticisms like this make Freeborn's future uncertain. He says he wants to take a long break before getting back in the game. It will take him time to rebuild his reputation, but as Freeborn puts it, the company's collapse was really just down "to a series of events" that were, unfortunately, all too unpredictable.
The hotel red herring
The many rumours that the Intercontinental Hotel project in Park Lane was one of the keys to Curzon’s downfall seem unfounded.
But it has had its problems. Won in March last year, the £25m refurbishment contract stalled when it was discovered that the hotel contained much more asbestos than at first thought – in fact, every one of the 449 rooms contained some.
The client decided to alter its programme. Originally it was to close only part of the hotel for refurbishment and then operate the rest. However, it decided to shut down the hotel completely during this stage.
The result of this move is that the project has only increased from £25m to £29m. By making the decision to close the hotel early on, Curzon expected to complete its work in September, three months ahead of schedule. The profit margin was likely to fall, but only slightly from 5-6% to 4%.
What is it about fit-out contractors?
Curzon’s collapse came more than a year after the fit-out sector reached its nadir. Between August 2004 and January 2005, Spectrum Projects, Benson and Bellwater all failed. These businesses essentially suffered from the terrible nosedive in commercial work in 2004.
Benson, for example, failed to win any work for three months, although its former chief executive, Alistair Sloan, insisted that the £125m-turnover contractor only needed an additional £1m overdraft facility to survive.
However, creditors were left owed £23m. Spectrum owed £7.73m to subcontractors and a further £700,000 to the Inland Revenue. Surrey-based Bellwater had debts totalling £3.9m. Bellwater’s core work was in IT offices and data centres, but when this sector started to dry up the firm made an ultimately unsuccessful push in to the commercial market.