In an almost carbon copy of the Carillion collapse, peer contracting firm Interserve went into administration on Friday due to a majority of its shareholders rebelling against a debt cancellation deal that would have seen their investment at even lower levels than the deal that was finally agreed to.
A different deal, however, went through that meant £485 million (U.S. $640.2 million) of existing debt, and an injection of £110 million (U.S. $145.2 million) of new credit into the company, led to the company being “sold” to a group controlled by its creditors. The transaction resulted in the company’s largest shareholders—including U.S. hedge fund Coltrane, which voted against the debt cancellation deal—seeing their holdings massively diluted. On the other hand, about 16,000 small shareholders are thought to have lost almost their entire investment. While there were unconfirmed rumours that the government was contemplating taking the company into public ownership—as it had some banks during the financial crisis—in order to avoid a total collapse like Carillion’s, such a move was avoided due to the debt deleveraging agreement.
“It is staggering that a year after the biggest corporate failure in modern U.K. history the government has carried on as though it is business as normal. The fact that no one involved in Carillion has yet had any form of action taken against them, demonstrates either that the regulators are failing to do their jobs or that existing laws are too weak. If it is the latter then we need better, stronger laws.”
Gail Cartmail, Assistant General Secretary, Unite
Again similar to Carillion, however, Interserve had been handed hundreds of millions of government contracts in the months leading up to it being placed in administration, despite profit warnings in most quarters for the last two years. Those profit warnings were partly due to a disastrously failed waste-to-energy project. According to British trades union GMB, the union that represents most of Interserve’s workers, the company was handed £660 million (U.S. $871.2 million) worth of public contracts in the months before its near collapse. According to an analysis by Tussell, a data provider on U.K. government contracts quoted in a GMB press release, Interserve was handed public contracts worth £432 million (U.S. $570.2 million) in 2017 and £233 million (U.S. $307.6 million) last year. Interserve now holds £2.1 billion (U.S. $2.8 billion) of public contracts.
Interserve (in administration) has announced the successful completion of the sale of the group. This alternative deleveraging transaction will restore the group’s balance sheet and provide additional liquidity. The administrators have immediately sold Interserve’s business and assets to a new company, to be controlled by Interserve’s lenders.
Interserve announcement of the transaction
All companies in the Group other than the parent company will remain solvent, providing continuity of service for customers and suppliers.
Completion of the transaction is anticipated to occur on or before Monday 18 March.
The Group believes this is the best remaining option to preserve value, protect the jobs of employees and ensure the Group can carry on as normal with minimal disruption.
The company has clients in more than 40 countries and has a workforce of around 68,000 people worldwide, though 45,000 of those are in the United Kingdom. The biggest contract it was awarded last year was a £66 million (U.S. $87.1 million) deal in July with the Foreign and Commonwealth Office to run facilities management services.
The company had gross borrowings of around £800 million (U.S. $1.06 billion) and made operating profits of only £75 million (U.S. $99 million) in 2017, a figure that did not include the writedowns from the energy-from-waste plants. That it should still be receiving millions of pounds of government contracts—some even after it had announced its debt restructuring deal—would seem to raise some red flags at least. It indicates that either its auditor, Grant Thornton, or the Financial Reporting Council (FRC), or both, should have been warning the government and other clients of its status as a going concern.
No such issues were raised by the auditor, though it is possible that the new authority replacing the FRC, the Audit, Reporting and Governance Authority, may act with its stronger powers. The FRC, which was criticised by members of Parliament for its handling of the audits of Carillion by firms including KPMG, is still investigating the circumstances of Carillion’s failure. The Insolvency Service, an arm of the Department for Business, Energy and Industrial Strategy (BEIS), is also investigating the Carillion collapse and began interviewing former directors of the company last year, though none have yet been prosecuted.
“The Government has still not taken on board any lessons from the collapse of Carillion. The outsourcing sector is descending into carnage as companies underbid each other for contracts in a race to the bottom which will see a serious decline in public services.”
Kevin Brandstatter, National Officer, GMB
Ironically, Interserve had unveiled its plans to improve finances to avoid what it referred to as “next Carillion” anxiety. It’s annual report for 2018 said: “In the face of adverse media speculation, Interserve, Capita, Kier and others in similar markets have taken steps to improve balance sheet strength and resilience.” Capita and Kier, however, both ran successful rights issues last year to raise money and had thus avoided Interserve’s fate.
David Robson, associate director, R&D with International Compliance Training, said in an e-mail: “A member of our GRC team said to me: ‘Governance failure, FRC not up to the task, lack of transparency.’ It seems as though the lack of external governance is a worry,” he continued, “but exacerbated by what appear to be poor internal decisions.”
Robson also questioned the government’s decision to award contracts to Interserve at the same time as criticising the lack of oversight of the firms auditing it. “I imagine this is why the FRC has been replaced,” he noted. “It will be good to see if this is rhetoric and bluster or promotes real change.”
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