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

The outsourcing giant 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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  27 comments for “Is the UK’s “Next Carillion” About to Fall?

  1. Wisdom Seeker
    Nov 13, 2018 at 8:11 pm

    Don Q, I love your work. As someone not from the UK, though, I could use a bit more context. How large is Interserve compared to Carillion? (In terms of revenues, or peak market value)? I see it has 70,000 employees whereas the Guardian links show Carillion had about 20,000 (at least at the end). Was Interserve generally 3-4 times larger or does it just employ lower-cost workers? If it’s larger, it’s more than just “the next Carillion”, isn’t it? (Would it be better to say Carillion was merely the first Interserve? !)

    The article mentions 3.9 Billion Euro-equivalent in total debt for the UK-contractor business sector. Even if they all went bankrupt at once, that seems small enough to be manageable from a financial perspective, although it’s obviously a big deal for the workers affected. But since we are talking about government spending, the work will get done somehow by someone, sooner or later, won’t it?The bigger story is perhaps for the nation as it begins to change the business model for this type of government contract work.

    P.S. From the BBC link: “Industry experts say that will make the government more confident it can manage an orderly process if Interserve collapses, “there is absolutely no way the government will put in public money. After Carillion went bust not a single child went without lunch and not a single hospital didn’t have its floor cleaned. The government has a playbook and will feel it can manage”.”

    • Atu
      Nov 13, 2018 at 10:27 pm

      “Former Audit Commission Director David Walker notes, “Whitehall departments, councils and other public bodies simply don’t have the capacity to take over the IT, facilities management and service commitments embedded in many PFIs.” And they don’t have the cash, either. “Contracting out and public-private partnerships are still very much in the government’s thinking as ministers wrestle with another 10 years of tough spending reviews.”

      Though the government reduced its PFI use following the 2008 financial crisis, it rebranded and relaunched the model as “PF2” in December of 2012, without many significant changes to the financing structure of the contract. The UK Government is reassessing its own methods of paying for infrastructure projects, taking advantage of ultra-low interest rates to issue up to £100bn in infrastructure bonds. ”

      From Killik and Co.

      The beeb is an Interserve contractor btw.

    • Nov 14, 2018 at 4:42 am

      Wisdom Seeker,

      Thanks for your questions. You’re right that Interserve has more employees than Carillion did. Interserve has a global workforce of around 70,000 whereas Carillion’s was around 43,000 when it kicked the bucket (The figure you cited from The Guardian was probably the firm’s UK workforce; the erroneous figure I mentioned in the article was a result of getting Carlillion’s workforce mixed up with another UK construction firm, Capita Plc’s, for which I apologize).

      But that does not mean that Carillion was the first Interserve, as you put it. Even though Interserve had more employees globally, a better indication of its overall size is its revenues, which at 3.25 billion GBP in 2017 are smaller than Carillion’s were (4.39 billion) during the latter’s last full year of semi-healthy existence, 2016.

      You’re right that none of these companies are remotely too big to fail. In fact, most companies, even pretty big ones, that aren’t banks can fail without causing an unseemly amount of economic chaos and mayhem. But that doesn’t mean that the financial hit for the government or the broader economy is negligible. Carillion, for example, left behind around 7 billion GDP of liabilities, including a pensions deficit of around 800 million GBP that will have to be filled with government funds. It also left hundreds of smaller contractors in the lurch.

      Arguably, the most important legacy of Carillion’s collapse is to lay bare the bankruptcy, both financial and moral, of the government’s multi-decade approach to outsourcing as well as raise serious questions about the conflicts of interest plaguing the Big Four accountancy firms’ audit practices.

      • Steve clayton
        Nov 14, 2018 at 7:00 am

        As with other outsourcing companies their business model relied on ever increasing income-taking on more debts, killing off competitors. Once that starts going the other way lower income, public companies realising they’re being ripped off, game over. Awful companies.

      • Mike G
        Nov 14, 2018 at 10:42 am

        Another triumph of Thatcherism and Privatization As Ideology.

      • Nov 14, 2018 at 4:16 pm

        Carillion appears to be part of this group now, so not much has changed, apart from a lot of smaller contractors were left with big debts and offered more bank debt to ‘help’ them out. All their vans are branded Carillion Amey….
        https://www.amey.co.uk/about-us/our-parent-company/

  2. Howard Fritz
    Nov 13, 2018 at 10:03 pm

    Wolf, you are a card! I wish I could post images in the comments section, I guess its good to be king.

    • Howard Fritz
      Nov 13, 2018 at 10:04 pm

      Did Wolf delete his picture of a toilet?

      • Nov 14, 2018 at 12:45 am

        Yes, I deleted my own comment and picture. No one is immune ;-]

        For readers who missed it, it was a screenshot of an ad, served by Google, for a fancy toilet, in this article about a company going down the crapper, with “circling the drain” in the subtitle. It was Google Humor, it was hilarious, but it probably violated one of my guidelines and it had to go.

        • flashlight joe
          Nov 14, 2018 at 11:35 am

          Re: Missing toilet picture

          Your site is not only informative, it’s entertaining!

  3. Kaz Augustin
    Nov 14, 2018 at 1:50 am

    Hold on a second, is there something I’m not getting?

    * Extensive use of contractors vs. actual benefit-accruing employees
    * Fingers in the lucrative detention industry (I assume that’s what “probation” means) as well as healthcare
    * Lots and lots of government contracts in military, transport and law

    and they’re STILL circling the drain?? I mean, what did they do? Use the burning of pound notes to run the heaters in all their businesses? How can a company obviously so well-connected fail like this, Don Q? The mind boggles.

    • MooMoo
      Nov 14, 2018 at 2:38 am

      …perhaps it was designed to fail. All of those PFIs???

      qui bono?

      • MD
        Nov 14, 2018 at 3:42 am

        Daft question.

        Money lenders/financial speculators ‘bono’.

        Have you not noticed..?

    • MD
      Nov 14, 2018 at 3:41 am

      Yep and yet we are still, as everything slowly falls over under the weight of debt, lectured that everything (in which there is potential profit) must be privatized because of the horrible wastefulness and inefficiency of state-run entities (although no comparative data are ever presented to back up the dogma).

      Full steam ahead, and remember there is no alternative!

    • MC01
      Nov 14, 2018 at 4:05 am

      Interserve had £407 million in long term debt in 2015. In 2017 it had gone to £650 million. Lease obligations have gone from £600,000 to £2.5 million over the same time frame. But that’s not all.
      At the end of 2017 they had £28.9 million in deferred taxes as well, up £10 million from the previous year.
      Their balance sheets also include a huge pile of “Miscellanous Current Liabilities” which isn’t broken down in detail.

      They may have their fingers in the honeypot, but the honeypot is not large enough to deal with how poorly this company is run.

      Personally I’d like to see how much they pay for office supplies and what they get for their money: I found it to be the best meter to see how a company is run. Usually poorly run companies massively overpay for the cheapest pencils and pens their supplier can find and that behavior trickles down to the top: they end up overpaying for everything, and getting abysmal quality to boot.
      When they are asked by the customer (in this case HM Government) to cut costs you get those now infamous problems with road surfacing or school catering because they are already buying the cheapest stuff around (at obscenely inflated prices) so to cut prices they have to cut corners.

      Apart from their management, executives and high and mid level employees, their contractors and vendors are those making off like bandits by selling supbar goods and services for their weight in gold.
      This is all part of that “trickledown” or “wealth effect” we have had rammed down out throat for years now.

      • Kaz Augustin
        Nov 14, 2018 at 5:24 am

        “Usually poorly run companies massively overpay for the cheapest pencils and pens their supplier can find…they end up overpaying for everything, and getting abysmal quality to boot.”
        Interesting you say that, MC01. I’m seeing exactly the same situation play out in a couple of spheres, but didn’t realise it was a bit of a universal giveaway viz. corporate incompetence. Noted and thanks for the tip.

        • MC01
          Nov 14, 2018 at 7:44 am

          Thanks, but always remember it’s all about the price/quality rate: if the pencils are nasty but were paid pennies for a hundred, all is fine. It’s when the company pays a box of unbranded highlighters three times as much as the same quantity of Faber-Castell’s that you should get worried.

    • raxadian
      Nov 14, 2018 at 6:44 am

      Simply put the company was a Junk Bond Star and cheap credit ending and Brexit happened.

      The company focused too much on profit and getting cheap debt instead of doing a good job.

      A Junk Bond Star is a company that depends on Junk Bonds to survive yet is rated as it was a Star, like Netflix and Tesla.

    • Hugs
      Nov 14, 2018 at 8:19 am

      Why the fail? No honor among thieves. Reason EU can’t replace SWIFT. Reason no one wants Rubble or Yuan.

  4. Jason
    Nov 14, 2018 at 5:50 am

    I bet the last audit report was unqualified…..

  5. Dan
    Nov 14, 2018 at 7:42 am

    There’s a growing problem with outsources in the UK. Previously, they won contracts by bidding low, then making their margins on ‘extras’, such as work not included in the original contract, specification changes etc.

    Lately, government procurers have been getting better at managing this, so the outsourcers are continuing to bid low, but no longer getting their profits boosted by weak contract management practices by the public sector. This has been magnified by the cessation of PFI projects.

    Carillion was the first one to go. Serco, Capita, G4S and interserve are feeling the heat. Its only a matter of time before they’re sunk by a business strategy that is longer working.

    • Steve clayton
      Nov 14, 2018 at 6:38 pm

      Spot on Dan. My experience is that the government-public sector procuerers due to austerity have got better reference tenders etc and controlling the costs which is no bad thing. Stop these big companies ripping off the taxpayer.

  6. Unamused
    Nov 14, 2018 at 9:55 am

    Is this another “fraud on the people”? Not that there’s anything wrong with that, you understand, but it seems only sporting to let the herds know who’s leading them to slaughter this time.

    It’s not easy distinguishing the more-or-less legitimate businesses from the ruthless racketeering operations these days. You know how it is.

  7. kk
    Nov 14, 2018 at 2:45 pm

    Interestingly, if you look at the company’s accounts a good 7 to 10 pages are concerned with a handful of directors and their pay and share options….

  8. V8
    Nov 14, 2018 at 3:29 pm

    Having first hand experience of Interserve, their work ethos/quality is rubbish and they deserve to fail for not providing decent customer satisfaction and I’ve no doubt the retention fees witheld by customers are contributing to their demise.

    On the issue of tender it cheap and make the extras expensive, I also have experience with large companies. Namely, their MO is the Operational Contract Managers are expected to extract 70p per £1 of contract value in additional works after the contract has been awarded…. Which I guess would be similiar across the industry and hidden at time of tender.

  9. Fred
    Nov 14, 2018 at 3:32 pm

    Debt. Debt. Debt.

    Same thing that’s killing GE.

  10. ML
    Nov 17, 2018 at 12:15 am

    I have won a contract to advise a government body. A first for my service. I was invited to bid. I don’t court the public / state sector. My fees are quite possibly the most competitive in UK. I expect my profit margin will be at least 50% despite my bid being the lowest price. I should think my competitors for the contract quoted at least 2-3 times as much but their profit margins are substantially lower than mine, at around 10%.

    The killer for profit margins are unrealistic and unstainable expectations by management and workforce pay and conditions. Big companies cannot survive on wafer thin margins so are obliged to borrow to keep up appearances. Government contracts are reassuring for workforce and shareholders but don’t pay much.

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