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Is the UK’s “Next Carillion” About to Fall?

Summary:
The company with 70,000 employees is “circling the drain.” By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET. When UK construction giant Carillion collapsed in January, it shook the foundations of Britain’s outsourcing industry to its core, casting a harsh light on the high-growth, thinning-margin, poor cash-flow, high-debt business model that has come to dominate the sector. It was the country’s biggest corporate bankruptcy in years. But now another outsourcing firm may be about to follow Carillion’s doomed footsteps. That firm’s name is Interserve. It employs over 70,000 people worldwide, with around 20,000 employees based in the UK. On Monday its shares plunged over 30% to 30 pence a piece, their lowest level in 30 years, before rebounding somewhat. They’re down 95%

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The company with 70,000 employees is “circling the drain.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

When UK construction giant Carillion collapsed in January, it shook the foundations of Britain’s outsourcing industry to its core, casting a harsh light on the high-growth, thinning-margin, poor cash-flow, high-debt business model that has come to dominate the sector. It was the country’s biggest corporate bankruptcy in years. But now another outsourcing firm may be about to follow Carillion’s doomed footsteps.

That firm’s name is Interserve. It employs over 70,000 people worldwide, with around 20,000 employees based in the UK. On Monday its shares plunged over 30% to 30 pence a piece, their lowest level in 30 years, before rebounding somewhat. They’re down 95% since April 2014.

The trigger this time was news that the company had missed yet another deadline for handing over a £145 million waste-to-energy plant in Derby, England. The plant was supposed to have started operating in March but didn’t. Then, on Monday, in its interim results for 2018-19, Interserve’s partner on the project, Renewi, revealed that Interserve had missed the “project long stop date” to get the plant working, which had been scheduled for the end of September.

In failing to meet this latest deadline, Interserve now faces the prospect of having to pay liquidated damages. That could be a problem for a firm that keeps losing money while racking up ever increasing amounts of debt, and whose market cap, after years of uninterrupted decline, is a measly £58 million.

In late January, in the immediate wake of Carillion’s collapse, the government became so worried about Interserve that it assigned a team of officials to monitor its financial situation. With the company now preparing to ask investors for a fresh injection of capital, just months after the last one, those concerns were well founded.

Interserve has been plagued for years by compounding losses in its waste management division. But recently the problems spread to its core UK businesses, almost all of which are under-performing, as the company itself alerted in a profit warning in October 2017:

In U.K. support services, [losses were] driven by the continued employment cost pressures in the business, the cost of contract mobilizations, margin deterioration driven by a cost base which has not been flexible enough and contract performance in the justice business. Our U.K. construction business has seen further deterioration in operating profit as challenging market conditions and cost pressures as well as operational delivery issues have continued to impact performance.

The company’s performance has worsened since then. In March this year it came within a hair’s breath of defaulting on its debt. But it was granted a last minute reprieve by a group of lenders who agreed to provide up to £291 million of new borrowing facilities. Those lenders are led by the Scottish tycoon Alan McIntosh, whose firm Emerald Investment specializes in buying distressed debt.

In other words, the vultures are circling. Even if McIntosh hopes to engineer an eventual recovery of Interserve, the company’s core problem — the poor performance of its underlying businesses — shows no sign of reversing. On Monday an unnamed ex-shareholder told the BBC that Interserve are unlikely to survive.

“We could be looking at another Carillion. I don’t see how they can raise the £500 million or so needed,” he said.

Like Carillion in its prime, Interserve is massively dependent on government contracts for most of the services it delivers, including probation, cleaning and healthcare. It is also involved in large construction projects and looks after UK military bases in the Falklands, Gibraltar, and Cyprus. It has been awarded juicy government contracts with the Ministries of Defence, Transport, Work and Pensions and Justice.

Yet, Interserve needs to tap investors for more money. But that money, as the unnamed ex-shareholder told the BBC, is unlikely to materialize: “The management team and its track record is not good enough to make a case for investing new money… unless something weird happens from left field, like government providing direct financial support.”

CMC Markets analysts David Madden put it even more bluntly, saying that the company was now “circling the drain,” with investors unconvinced that management would be able to turn the situation around.

But Interserve is not the only major UK construction company that is struggling in this post-Carillion, pre-Brexit reality. Recent research by the weekly publication Construction News revealed that the average pre-tax margin for the 10 biggest UK contractors has fallen for the fifth consecutive year, to -0.9%, while their combined debt rocketed 24% year-on-year to €3.9 billion. Dividends have also been slashed, as evidence emerges of firms tightening their belts ahead of Brexit. By Don Quijones.

A “fraud on the people.” Read…  After Carillion Collapse, UK Government Sounds Death Knell for Public-Private Partnership Finance  
 

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