Interserve Faces Administration.
James Salmon, Director, 15th March 2019.
Interserve enters administration after rescue deal fails
Government outsourcer Interserve has gone into administration after a proposed refinancing package to save the company was opposed by shareholders last week.
Despite its £630m debt burden, the private contractor had hoped to stay afloat by selling new shares in the company under a rescue deal. However, major shareholders including US hedge fund Coltrane Asset Management criticised the proposal, which they deemed “terrible” for investor value. The restructuring would have reduced shareholders’ stakes to 5%, with the rest of the business handed to creditors. Shareholder value was entirely wiped out by the company entering administration after the deal was blocked, with Coltrane subsequently threatening to sue Interserve for mismanagement of the refinancing plans and the demolition of its 27% holding.
Pre-pack transaction maintains operations
Following the rescue deal’s rejection, Interserve instated a pre-pack arrangement (PPA) – a vehicle which allows companies to move their assets to a new owner before administrators are officially appointed. Assets were moved to a group controlled by Interserve’s lenders – including RBS, HSBC and hedge funds Emerald Asset Management, Cerberus and Davidson Kempner Capital – with administrators from EY appointed to take over the company.
By clearing all company assets and rushing through a quick sale to its lenders via the High Court and PPA vehicle, Interserve managed to avoid total collapse – allowing its operating subsidiaries to continue trading with suppliers and customers. The administrators noted: “This transaction secured the jobs of 68,000 employees, the majority of whom work in the UK, as well as ensuring there was no disruption to the vital public services that Interserve provides to the UK Government.”
16,500 retail investors wiped out
Interserve’s actions will be welcomed by some for avoiding the possibility of a Carillion-style collapse. The construction company’s 2018 meltdown caused ripple problems for businesses across the sector. However, the PPA has wiped out investors and is accused by some of placing the interests of lenders above those of shareholders, including 16,500 retail investors.
The private company, which is one of Britain’s main government contractors, is employed for the maintaining and cleaning of schools, railway stations, hospitals and government offices amongst others. It currently has at least 50 live contracts with the government, worth an estimated £2.1bn, and gets two-thirds of its business from the state. However, its debt began to accumulate unsustainably following a failed waste energy project based in Derby and Glasgow, and delays to construction projects compounded by a broader downturn in the outsourcing market.
So Interserve are set for administration after investors reject the rescue plan and the investors will be left with nothing rather than the 5% they would have gor under the plan. Go figure!
The public outsourcer made the announcement after investors voted to reject its proposed deal by 59 per cent to 41 per cent.
The public sector outsourcing giant has been embroiled in a power struggle in recent weeks with its lead shareholder, US hedge fund Coltrane Asset Management, over the terms of the emergency deal.
Workers at the NHS and the Foreign Office are among the 39,000 UK employees, and 70 per cent of its annual £2.9bn turnover comes from the government. An expected pre-pack arrangement managed by EY would keep public services running smoothly for the immediate future, meaning jobs will not be lost in the short term.
A spokesman for the Cabinet Office, which awards these contracts to firms like Interserve for the delivery of public services and is the company’s largest client, said: “This announcement will not affect jobs or the provision of public services delivered by Interserve. We are in close contact with the company and we are confident a positive way forward will be found.”
Hedge fund Coltrane, which holds a 27.7 per cent stake in the outsourcer has vigorously opposed its deal for weeks, even threatening to sue the firm’s directors.
Under Interserve’s deal’s terms, shareholders would have been left with five per cent of the company and the right to buy new shares up to a maximum of 33.3 per cent.
Interserve needed 50 per cent of shareholders to back the deal to avoid going into administration, but it fell well short of this, with 59 per cent voting against and 41 per cent voting in favour.
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We had identified Interserve to our members as being at risk last year.
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