黑洞社区

Ten minutes after announcing details of its latest rescue plan last Wednesday morning, Interserve was forced to put out another update telling the market that a New York-based hedge fund called Coltrane Asset Management, which has a 17% stake in the business, was intending to organise a shareholder revolt against the plan.

Coltrane, which made millions of pounds betting on the demise of Interserve鈥檚 rival contractor Carillion last year, wants to vote out all of the group鈥檚 board with the exception of chief executive Debbie White and is hoping to persuade other shareholders to take up the fight. In short, the rescue plan will see Interserve鈥檚 lenders cut what they鈥檙e owed by half, swapping their stakes for shares, resulting in creditors owning 97.5% of the company. Unsurprisingly, Coltrane isn鈥檛 too keen to see its stake wiped out like this and has requisitioned an extraordinary general meeting to be held by the end of March.

Among those it wants gone are chairman Glyn Barker, chief financial officer Mark Whiteling and non-executive Nick Pollard, the former Balfour Beatty, Skanska and Bovis Lend Lease executive who joined last June and who, as the boss of Cory Riverside Energy, an energy-from-waste firm, has been helping try to find the best way out of Interserve鈥檚 disastrous EfW contracts.

Interserve announced this morning that another name on its hit list, Dougie Sutherland, the main board director in charge of sorting out its problem energy-from-waste (EfW) jobs, had stepped down with immediate effect and was formally leaving the firm at the end of the month, ending a 12 year association with the business.

鈥淭here could be a sufficient number of unhappy existing holders disenchanted enough to write off the balance of their massively diluted investments鈥�

Kevin Cammack, Cenkos

A timeline of Interserve鈥檚 financial problems - keep up to date

Coltrane would prefer to see an alternative recovery plan, which would safeguard shareholder value and work down debt more slowly through cash generation along with the odd disposal here and there, rather than hand control of the business to banks such as HSBC, BNP Paribas and Royal Bank of Scotland which, along with other lenders, have agreed to cut net debt to 拢275m in exchange for 拢480m of new shares. Existing lenders will also provide an extra 拢75m in liquidity.

Cenkos analyst Kevin Cammack thinks Coltrane might have a chance of pulling off a revolt. 鈥淭here could be a sufficient number of unhappy existing holders disenchanted enough to write off the balance of their massively diluted investments rather than see the business effectively passed into the hands of its lenders.鈥�

And a source close to Coltrane said: 鈥淪hareholders will be wiped out by this restructuring. It鈥檚 difficult to see shareholders not agreeing with what Coltrane is saying.鈥�

But White has said the plan, which has the backing of the government, is pretty much the only deal available. 鈥淭he board believes that this agreement will secure a strong future for Interserve,鈥� she said when the rescue plan was announced. 鈥淚ts successful implementation is critical to the Interserve group鈥檚 future and all of its stakeholders.鈥�

Any shareholder revolt, though, could prove to be just a 鈥渄amn you鈥� one, an empty protest with no real alternative to support it. But what happens if shareholders do vote it down when it is finally stitched together and presented to shareholders in the next few weeks?

鈥淭wo weeks ago, I would have said it was 95% they will go. Now I鈥檇 say it鈥檚 more like 60:40 they will survive鈥�

Tony Williams, 黑洞社区 Value

Cammack says an obvious lack of an alternative might be enough to convince shareholders to back it, however reluctantly. 鈥淥f course, dilution to just 2.5% of the enlarged equity is a hard pill to swallow but at least it is 2.5% of something rather than 100% of nothing.鈥� And he adds: 鈥淛ust what is [plan B] beyond turning to government for financial support 鈥� or begging?鈥� The alternative, some people believe, is the risk that Interserve will fall into administration. 

Interserve鈥檚 most successful business, the RMD Kwikform shoring subsidiary, is being kept in the company, after the Cabinet Office spiked plans by the banks to spin it off because of concerns that without RMD, which in 2017 made a pre-tax profit of 拢15m from a 拢42m turnover, Interserve would be too weak to be awarded government contracts which account for around 70% of the firm鈥檚 拢3.7bn turnover. Instead, the price RMD will have to pay is having around 拢350m of existing debt allocated to it over the next four-and-a-bit years. 

Cammack, who 18 months ago called for Interserve to hoist the 鈥渇or sale鈥� sign over RMD in the hope of picking up 拢200m for the business, says RMD 鈥渨ill need every day of the four- to five-year term to make any sort of inroads into the [debt which] also reduces its [RMD鈥檚]  saleability鈥�.

Energy from waste 鈥� the capability gap

RMD was being readied for sale three years ago, with Interserve鈥檚 then chief executive Adrian Ringrose saying it had put the business under a strategic review when announcing its 2015 results in February 2016. But eight months later RMD was told it would be staying at Interserve. Four weeks after that, Ringrose was off 鈥� with Interserve telling the market the man who had masterminded its disastrous foray into the EfW sector would be leaving the following year.

Energy-from-waste has been the running sore that has provided the backdrop to the firm鈥檚 problems for some time now. Gordon Kew, Interserve鈥檚 former boss of its construction business, admitted to 黑洞社区 last May that the firm had woefully underestimated the EfW market. 鈥淭here was definitely a capability gap,鈥� Kew admitted. 鈥淲e went into a new sector that we鈥檇 thought we鈥檇 prepared for and clearly we hadn鈥檛.鈥�

Kew has since moved on, leaving the business last September as part of White鈥檚 streamlining process, joining ISG last month as its chief operating officer. While still at Interserve, he said the business expected to have wrapped up completing its EfW work by the end of last year. It proved to be another EfW deadline missed and the firm still needs to complete three more EfW plants after handing over a plant in Dunbar, Scotland, last month to client Viridor 鈥� the same one that kicked Interserve off a similar job in Glasgow back in autumn 2016 and which claims the firm owes it more than 拢60m.

The remaining jobs are in joint venture with US energy tech firm Babcock & Wilcox in Rotherham, South Yorkshire, and Margam in south Wales 鈥� as well as a plant in Derby being developed with waste management specialist Renewi. Babcock & Wilcox has previously told investors that each of the three plants it was building in the UK, including Dunbar, would be finished by this July.

The whole EfW misstep, which began nearly seven years ago when the firm won a 拢146m deal to build a new facility in Glasgow, has cost the business more than 拢220m. Speaking to 黑洞社区 15 months ago, before he joined Interserve as a non-executive director, Pollard was damning of firms like Interserve which went into a market they are unfamiliar with. 鈥淚f you don鈥檛 understand the risk or don鈥檛 have the people to construct that asset, don鈥檛 do it.鈥�

Avoiding another Carillion

Interserve has not yet said when it will publish its 2018 results, but if last year is anything to go by 鈥� when it filed on the last possible day it could 鈥� we might have to wait until the end of April. It鈥檚 unlikely to put any numbers out until full details of the deleveraging plan are out and signed off by shareholders. The firm, which last published a trading update on 23 November last year, has a market cap of 拢17m 鈥� down from 拢500m two years ago 鈥� so the cynics will point out there鈥檚 not much further for it to fall in that regard.

But local councils have their worries and have been drawing up contingency plans in case it does 鈥� such is their fear of being landed with a Carillion-style hit on local services.

Interserve has been on the Cabinet Office鈥檚 watch list of 鈥渁t risk鈥� businesses, being required to draw up a so-called living will in the event of its collapse. And here is the major stumbling block for a Coltrane-led revolt. The government does not want another Carillion on its watch. Equally, it does not want to be pumping money into having to bail out a private firm that has run aground because of poor decision-making. 鈥淚 suspect [Interserve鈥檚 plan] will prove to be the best deal in town,鈥� says Cammack. 鈥淭his was never going to be easy and anything other than painful for investors.鈥�

Tony Williams, an analyst at 黑洞社区 Value, says Interserve is clinging on by its fingernails but has a better chance of survival than it did before. 鈥淭wo weeks ago, I would have said it was 95% they will go. Now I鈥檇 say it鈥檚 more like 60:40 they will survive. There is a business still there and if it can bump along the bottom, then it could recover. Costain went down to a penny stock [back in the 1990s] and recovered with the help of overseas investors.鈥�

But do the brightest and the best want to work there? Williams thinks Interserve will have to pay top dollar to attract and retain people, but already some have decided enough is enough. Matthew Fundrey, the bid director at Interserve鈥檚 Paragon fit-out business, has joined Mace. Williams thinks that up to 10% of Interserve鈥檚 75,000 staff worldwide 鈥� 45,000 of them in the UK 鈥� could eventually be eased out as part of any recovery strategy.

At best, the plan announced last week would seem to represent the least-worst option for a business that saw its shares sink to their lowest amount since 1984 last November, only for them to slide even further the following month, at one point dropping to 6.5p on 10 December, as investors digested the initial reports of what sort of haircut they were going to have to take on their stakes. Under this plan, the government doesn鈥檛 lose money and another construction firm doesn鈥檛 go under.

Still, investors would do well to avoid casting their minds back to the peak days of 2014. Then, Interserve鈥檚 shares traded for 717p each.