Jarvis digs deep

Jarvis has had its share of trouble in recent years but never, one suspects, anything to compare with its current crisis. The firm that grew rich working for the post-privatised rail network, and the one most closely associated with the fall of Railtrack, is now under fire on multiple fronts; from health, education and university PFIs to local authority outsourcing and the rump of its rail operations. The danger for Jarvis is that it will enter that vicious circle in which a company's poor reputation leads to critical scrutiny and headlines that damage its reputation and lead to further, more hostile, scrutiny … The knock-on effects, in terms of future work, could be ruinous.

Desperate times call for desperate measures. Building understands that in the wake of last week's profit warning, together with the public criticism the £1.2bn-turnover firm has received for its payment practices, management changes are afoot. A source close to Jarvis predicted the imminent stepping-down of chief executive Kevin Hyde, who only took up the post last May after being chief operating officer. It is understood that Jarvis will look for an external candidate to replace Hyde if he does go.

Jarvis, however, has categorically denied this. A company spokesperson said: "There is absolutely no question of Kevin Hyde leaving his position as group chief executive of Jarvis. Kevin is committed to seeing through his strategy for Jarvis plc and moving the company forward in its chosen markets of infrastructure services and facilities management."

Other measures are also being planned. Building understands that a rebranding exercise is under way within the group. Jarvis is on the verge of launching a PFI financing division called Engender. Business cards have already been printed, according to sources at the new division, and the expectation is that this rebranding exercise will be extended to other parts of the group. Building was put through to a staff member of Engender when it contacted the firm's London office. He remained tight-lipped about the exercise. "Nothing is official. I'm not really in a position to say anything yet," he said.

The moves are a response to the gradual soiling of the firm's name and reputation. This reached a head last Tuesday when a report in the Financial Times raised concerns over its performance in building and maintaining schools and universities and its 90-day payment policy for subcontractors. This was nothing new. BBC Radio's File on 4 had criticised its Wirral schools PFI in November.

But the FT investigation included three other school PFIs and reported a campaign launched by subcontractors' trade body The Specialist Engineering Contractor's Group to get the government to look at Jarvis' payment policy (see Rudi Klein, overleaf).

Jarvis is launching a PFI financing arm called Engender and will roll it out across the group. Business cards have already been printed

Jarvis responded to this by denying that such delays were endemic, pointing to 65 of its 70 schools projects in the past year being completed on time, well above the PFI industry norm. On the payment criticism, it said that the group paid creditors on average within 42 days and that its education division was in line with, or better than, the industry.

Despite its protestations, the effect on Jarvis was immediate: stocks plunged 24%.

Things got even worse last Wednesday, when Jarvis said that 14 PFI schemes had been delayed, and that as a result its year-end results would be £12m down on predictions. The stock promptly plunged a further 13% to 121.5p (as Building went to press, the share price had rallied to 146.5p). The two sharp falls in value deepened concerns over the firm's performance. One analyst, Mark Howson at ABN Amro, suggested that the firm might break its banking covenants in March if it did not receive £28m owed by Network Rail. This is denied by Jarvis.

Next the firm's own broker, Dresdner Kleinwort Wasserstein, plunged another dagger into its client, citing concerns about Jarvis' cash flow, and downgraded its client recommendation from buy to hold. As one commentator put it: "When your broker loses faith, you have to worry."

The week ended with speculation that the firm's plunging share price made it vulnerable to a takeover. Balfour Beatty was named as a possible suitor, although this was flatly denied by Balfour. Add the controversial figure of Jarvis' new chairman and London mayoral candidate Steve Norris – criticised for holding both positions at the same time – and you could be forgiven for thinking that Jarvis' week was about as bad as that of the BBC's.

Much will depend on whether the firm delivers on the delayed PFI schemes and sorts out payment

The company has been quick to claim that payment disputes are part and parcel of the industry and that it was unfair of the FT to single out its dealings with just 12 of the 3000 or so specialists that it does business with. The firm added that it was looking to cut bid costs on PFI projects by £6m in the hope that it didn't have to repeat last week's profits warning. But are such measures going to be enough to stop the rot?

The present difficulties are the latest twist in the fortunes of the company, which was dramatically turned from a moribund contractor into a thriving PFI and rail firm in the mid-1990s under the charismatic leadership of Paris Moayedi. Jarvis defenders point to the year 2000, when the company's share price fell to the low 100s after a dispute with its auditor, PricewaterhouseCoopers – only to recover to nearly 600p in early 2002. This more optimistic reading of events is bolstered by references to support services consultant Atkins which, from a low of 52p in 2001, is now valued at more than 500p a share. Surely, the optimists argue, the same can happen to Jarvis?

Two factors are working against this cheery scenario. One is the firm's tarnished brand. The Jarvis name has been associated with poor rail maintenance since the Potters Bar train crash in 2002, and that association has contaminated the rest of its operations. Just last month, for example, a teachers' union in Derby launched a campaign to stop Jarvis winning a £43.8m PFI deal to refurbish and maintain five local schools. And, as Building reported last week (page 11), the firm's chances of picking up £450m of local authority outsourcing work – it is bidding for two major deals in Westminster and Salford – are now significantly poorer.

"They seem to be suffering from a long period of adverse news. It's an accumulation of one story after another," says a source from a rival contractor, who thinks the firm's troubles cannot all be blamed on Potters Bar. He points out that the tragedy did not stop the group winning work in other sectors and that profits were up 37% in the year of the crash.

Just after Moayedi stepped down as chairman last November, a source close to him admitted that the problems were mounting. He said: "Paris believes the PFI process to be too political and because of this, every time a project goes slightly wrong it generates negative headlines. He is a businessman, not a politician, and has found it increasingly difficult to operate effectively."

The other factor working against another turnaround is the fallout from the company's handover of rail maintenance last autumn. Although some saw it as drawing a line under Jarvis' image problem, others regard it as a failure of business nous. The contracts Jarvis handed over to Network Rail were profitable, and their loss may have unbalanced the business. One industry source said Jarvis' rail maintenance division, which had been enjoying profit margins of about 9%, protected the company from possible losses in construction. This back-up is no longer there. "Mistakes in performance come to the surface in a more transparent way now," adds the source.