Interserve, one of the British government’s biggest contractors, was placed in administration late on Friday and immediately taken over by its lenders only hours after shareholders rejected a rescue plan for the debt-laden company.
The public services provider employs 68,000 people globally, including 45,000 in Britain, to clean schools and hospitals, run probation services and build roads and bridges but has been battling to avoid being consigned to the same fate as collapsed rival Carillion.
EY was appointed as administrator with Interserve’s assets then moving immediately to a newly incorporated company to be controlled by the group’s lenders, thereby wiping out existing shareholders.
It is “business as usual for employees, customers, suppliers, and other stakeholders”, Interserve said, but it did not comment on whether the management team will remain unchanged.
A spokesman for the Cabinet Office, which oversees government contracts, welcomed Friday’s developments.
“It brings the company the stability required for it to compete for future business and continue to deliver good value public services for the taxpayer,” the spokesman said.
The takeover by the company’s creditors failed to deflect criticism, however, with fresh questions raised about the resilience of Britain’s outsourcing sector a little more than a year after Carillion fell into liquidation.
“Financial models adopted by these large outsourcers pose an ever-present and potentially very damaging risk to their supply chains,” said Rudi Klein, CEO of Specialist Engineering Contractors’ Group, which employs a number of subcontractors for companies such as Interserve.
“Following Carillion’s collapse, it was generally assumed that there would be a radical reappraisal of the public sector’s approach to construction/infrastructure procurement,” Klein added. “This hasn’t happened”.
‘FAILED MODEL’
Interserve ran into difficulty after a string of ill-advised acquisitions and loss-making contracts, but other British service providers have been hit in recent years after taking on work during the financial crisis at low prices for long contracts that have also proved problematic for groups including Capita and Mitie.
Britain’s biggest labor union Unite, which represents more than 1,700 Interserve employees and is the largest union at the company, said it was seeking an urgent meeting with administrators.
“Once again we have seen the government’s outsourced model fail,” said Colenzo Jarrett-Thorpe, Unite’s national officer. “The government has been asleep at the wheel since Carillion’s collapse last year and if no action is taken we face further corporate collapses.”
The GMB union, which also represents Interserve workers, called for an end to the “disastrous experiment” of outsourcing.
“Shambolic mismanagement is putting jobs on the line and services in jeopardy. Our public services can’t go on like this,” the GMB said in a statement.
Tony Williams, a construction analyst at Building Value, said there was nothing wrong with outsourcing, but the likes of Carillion and Interserve had squandered too much cash on misguided and expensive acquisitions.
INVESTOR FALLOUT
A debt-for-equity rescue package proposed by the company’s lenders at a general meeting in Central London was opposed by 59 percent of Interserve’s shareholders.
The plan would have handed Interserve’s lenders 95 percent of the company in exchange for cancelling 485 million pounds ($642 million) of its debts, with existing investors’ holdings diluted to 5 percent.
Interserve said on Friday that a transaction was being implemented that would achieve broadly the same outcomes by exchanging the same level of debt for shares and injecting 110 million pounds of additional liquidity.
The company’s lenders include RBS, HSBC, BNP Paribas and hedge funds Emerald and Cerberus.
Glyn Barker, Interserve’s chairman, warned against forcing it into administration ahead of Friday’s shareholder vote, arguing it would be more disruptive and costly and wipe out all shareholder value.
Interserve’s largest shareholder, U.S. hedge fund Coltrane, which owns a 28 percent stake, had opposed the rescue plan after Interserve rebuffed an alternative proposal as unworkable.
A representative for Coltrane at the general meeting declined to comment on the situation, other than saying “I voted for Donald Trump” when asked how the firm had voted.
Interserve shares were heavily shorted heading into the vote, with hedge funds owning more than a third of Interserve stock, data from Refinitiv showed.
The brokerage arms of two leading investment banks – Goldman Sachs and JPMorgan – which can help funds bet against a company, were among the top 10 holders.
At the close of trading on Thursday, two hedge fund firms – Brightsphere Inc and Millennium International – had short positions in Interserve greater than 0.5 percent, Financial Conduct Authority data showed.
Source: Reuters.com