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Are Interserve's darkest days behind it?

When Interserve released its annual results last week, the market was braced for the worst. Months of profit warnings, tense conversations with lenders and inevitable comparisons with collapsed rival Carillion meant that few would have been surprised with another shocking set of figures.
And to some extent that is what the City got: during 2017, Interserve’s losses widened to ?244m and its net debt almost doubled on the previous year to ?502.6m. Extra money needed to be put aside for various parts of the business, including a further ?35m for a delayed energy-from-waste project that had already cost the business around ?160m.
But are these the last of Interserve’s dark days? Debbie White, the chief executive parachuted in to turn the company around last September has, in her own words, been “extremely busy” trying to get the business back on track.
Its management, along with the ­Government, is keen to avoid another Carillion-like situation. The rival company slid into receivership in January, dogged by a yawning pensions deficit and the apparent mismanagement of hundreds of its contracts. There are some who say that Interserve could well face the same fate. Like Carillion, its operations are spread across a dizzying number of subsidiary companies and oversight of the business seems to have slipped in recent years.
Interserve
In the UK alone, the company ­operates under 13 different brands.
But alongside the results, White ­suggested that her plans to bring ­Interserve back from the brink are ­beginning to work. She says that from day one in the post she was determined to make changes. She implemented some basic structures in the business that had previously been lacking, ­setting up stronger management through a contract review committee.
This committee reviews each contract as it comes in. “That sort of thing just wasn’t in place before,” she says, incredulously. She has also overhauled the top team, bringing in Mark Whiteling, a new finance director, from Premier Farnell and appointing Sally Cabrini in a new role as director of transformation, IT and people.
White admits she breathed a sigh of relief when the company finally signed a refinancing deal with its banks last month, giving it total borrowing facilities of ?834m. The talks had initially floundered after banks became nervous about lending to the sector in the wake of Carillion’s failure. As a result, the terms of the refinancing are tight, and the extra due diligence needed to push the deal over the line will not have come cheap, with PwC, EY and law firm Ashurst ­understood to have spent hours ­brokering the deal.
Nevertheless, her three-year self-help plan is expected to deliver ?40m to ?50m of benefit to the group operating profit by 2020, with a ?15m benefit expected in 2018. However, the cost of implementing the programme was ?16.5m in 2017 and will be around ?15m this year, adding to Interserve’s bills, at least in the short term.
Are Interserve's darkest days behind it?

Debbie White, Interserve's chief executive
Of the three main areas where ­Interserve operates, its construction business is performing the worst. This again raises parallels with Carillion.
Losses in Interserve’s construction division rose from ?3.1m to ?19.4m last year, as the company struggled to make money in an industry that continues to drive thinner margins.
White has said previously that the construction business could reduce in size as she seeks to concentrate her ­efforts on winning support services contracts, where her expertise as the ­former boss of Sodexo lies.
But market observers suggested that she could seek to sell the entire construction business – before it’s too late. If ­Interserve sold the division now, it could raise around ?250m on its own, wiping out a large proportion of the company’s debt. However, if it waits, the value of its contracts book will decrease as its takes on fewer projects, and it would be worth far less to a potential buyer.
White insists that even here, ­Interserve has strengths.
“Both in construction and support services, Interserve has a reputation for doing things really well, especially in health and education,” she insists.
Interserve’s troubles and the ­collapse of Carillion have caused ­observers to suggest that the whole outsourcing ­industry, particularly in construction, needs to change.
Brendan Sharkey, head of construction and real estate at professional ­services firm MHA MacIntyre Hudson, says: “The DNA of these companies, even if they’re going after work that they are skilled in doing, is to go very low on price.”
Interserve will find ‘next Carillion’ tag hard to shake
He says the Government needs to help outsourcing firms by awarding contracts to the best business for the job, rather than the one that offers the lowest price.
“Ministers could make a difference in the marketplace,” he says, adding that the recent problems have resulted in a change of attitudes from ­companies, which have now decided just to take on work they know they can do.
This is what White says Interserve is trying to ensure. “What’s really ­important is that we focus on things that we’re really good at and we only bid for work that we know we can knock out of the park,” she explains.
There are bright spots in Interserve’s activities: revenue and profit at the equipment services business, which provides equipment for large infrastructure and building projects in 40 countries, has grown consistently for the last five years.
But the facts remain: Interserve is battling half a billion pounds of debt. This year alone, interest on its debt will cost the company ?67m according to Sam Dindol at Stifel.
“The group’s refinancing has come at a considerable cost,” he says.
Are Interserve's darkest days behind it?

A consortium led by Interserve won an ?85m project from Durham University to finance, design, build and operate two new colleges in Durham City at the end of last year

Credit:
Washington Imaging / Alamy Stock Photo
If White does not take action to ­reduce leverage quickly, it could end up becoming a zombie business, one source close to the company warns. That would leave White seeking a ­Government bail-out or watching ­Interserve collapse completely.
There are rumblings that a rights issue could be Interserve’s best option if it wants to raise cash quickly. Otherwise, there are “30 or 40” smaller businesses that could be sold within the next 12 months which would raise several hundreds of millions of pounds, one investor says. Interserve currently has operations in Spain and the Middle East which could be first for the chop.
While White is full of optimism, Interserve’s share price indicates the City is not convinced by the plan. Despite her best efforts so far, it has failed to fully recover from a dire profit warning in September when its shares lost half of their value in the space of a few hours, hitting 73.75p. Since then, they have slipped even lower to around 55p.
At the end of last week, the price was 87.5p – a long way from the ?2.42 it was trading at this time last year. There is still an awfully long way to go.
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