Shareholders wiped out, 14 Months after competitor Carillion Collapsed.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Shares in UK outsourcing giant Interserve, which employs over 65,000 people worldwide including 45,000 in the UK, were suspended today after almost 60% of the firm’s shareholders, led by the US hedge fund Coltrane Asset Management, rejected a last-ditch debt-for-equity swap with Interserve’s creditors that would have diluted the shares of current stockholders to nearly nothing, leaving them just 5%. The company has thousands of government contracts, including for hospital cleaning, probation services, school meals and the maintenance of military bases.
Interserve now faces a “pre-pack” administration that — it is hoped — will see its various divisions and 45,000 UK staff insulated from the fallout. The firm’s lenders, including HSBC and RBS, and bondholders, will agree to write off £485 million of Interserve’s crippling £631 million debt and inject £110 million of additional funds, in return for ownership of the company’s stock. By Friday’s close, all of Interserve’s business and assets are expected to be transferred to a newly-incorporated company, which will be owned by the existing lenders.
Current stock holders are out of luck. They’d already seen the stock tumble 96% over the past two years, will now be wiped out altogether. That includes Coltrane, which owned 28% of the shares and has threatened to take legal action for unfairly favoring lenders over shareholders.
Interserve said the deal was “the best remaining option to preserve value, protect the jobs of employees, and ensure the Group can carry on as normal with minimal disruption.” Once the pre-pack is in place, Interserve should be able to continue trading, thus mitigating potential disruption to the key public services that Interserve manages for the government. At least that’s the plan.
Interserve had been working on this contingency plan in advance of the vote to prevent a possible repeat of the disorderly collapse of Carillion in January 2018, which shook the foundations of Britain’s outsourcing industry, triggered the collapse of hundreds of supply firms, and left the British government holding a tab for at least £148 million, of which an estimated £50 million will go to auditor PwC for its work in the liquidation.
A Cabinet Office spokesperson said the Carillion debacle will not be repeated. The announcement of the pre-pack administration “will not affect jobs or the provision of public services delivered by Interserve,” he said. “We are in close contact with the company and we are confident a positive way forward will be found.”
Ironically, just three months ago the same UK government was confidently assured that Interserve would not be another Carillion and was even awarding the company fresh tenders — whatever it would take to keep the company solvent. It clearly wasn’t enough.
The question now is whether Interserve’s new management will be able to turn the company around. While Carillion’s collapse was largely the result of Enron-esque accounting that was eventually unearthed by a finance director who was swiftly dismissed for his troubles, Interserve’s decline can be traced back to an ill-advised foray into the waste recycling business, which produced compounding losses that proved impossible to absorb.
In 2017 the company alerted, in the first of a string of profit warnings, that those problems had spread to its core UK businesses, almost all of which were under-performing. Like many in the UK’s outsourcing sector, the company was unable to reverse thinning margins on major contracts — a result of fierce competition and belt tightening by the UK government in the wake of crisis. Those margins are unlikely to grow in the months ahead.
More importantly, Interserve’s demise lends credence to the notion that Carillion’s collapse last year, rather than being a one-off episode, was in actual fact the swan song of a deeply flawed and dying business model that has made a very small few fabulously rich while saddling future generations with huge amounts of debt for increasingly shoddy public services the private sector is no longer able to provide.
A scathing parliamentary inquiry last year accused successive British governments of using the Public Finance Initiative (PFI) to keep many of its current liabilities off balance sheet, Enron-style, while also awarding well-connected businesses and investors lucrative public work contracts. Even if the government doesn’t enter into any new PFI-type deals, it will end up having to pay private companies almost £200 billion, including in interest to lenders, until the 2040s for existing deals, in addition to some £110 billion already paid. That’s for 700 projects worth around £60 billion.
What’s not clear is how many of those businesses will still be around in the 2040s to pick up the bill. Research last year by the weekly publication Construction News revealed that the average pre-tax margin for the 10 biggest UK contractors fell 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.
To make matter even worse, banks and investors that had already incurred large losses on Carillion and are now having to take over Interserve’s business are likely to be even more reticent about backing the industry, particularly as it faces greater scrutiny from regulators as well as the rising risk of local authorities taking contracts back in-house. The ultimate irony is that some of the same banks that feasted on the absurdly high interest rates the UK government agreed to pay on its PFI deals — at times as high as 3.75 percentage points higher than the cost of government borrowing — are now themselves, thanks to Interserve’s collapse, public service providers. By Don Quijones.
The acquisition created world’s biggest toll-road operator. But it was costly. Read… Toll-Road Giant Abertis Just Doubled its Debt to €22 Bn to Pay a Special Dividend to the Companies that Acquired it Last Year
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Make promises to give more free stuff away to buy votes.
Instead of raising taxes or cutting other spending to pay for those promises. Shovel (outsource) them on to a debt laden public company.
Collect campaign donations.
Retire before these companies implode. Or just say “No one could have seen this coming…”
“A scathing parliamentary inquiry last year accused successive British governments of using the Public Finance Initiative (PFI) to keep many of its current liabilities off balance sheet,”
I’d like to highlight the “Enron” part you missed out…(emphasis mine)
– “Carillion’s collapse was largely the result of ENRON-esque accounting that was eventually unearthed by a finance director who was swiftly dismissed for his troubles…”
– “A scathing parliamentary inquiry last year accused successive British governments of using the Public Finance Initiative (PFI) to keep many of its current liabilities off balance sheet, ENRON-style…”
Is it mere coincidence that Enron-style accounting was mentioned for both corporate AND government behavior?
Meaning nothing has changed since the 1980s with Enron and other financial chicanery.
If that finance director had just kept his mouth shut and feign ignorance, nothing would have collapsed, everyone gets to keep their jobs and everything would have gone on business as usual right?
So my question is why expose it? :-)
I mean that salt-of-the-Earth, honest-to-God finance director would probably have difficulty finding another well-paying job with the smirch on his resume; and then even if he manages to find another employer, can anyone guarantee that his new company will not have their own kind of unspeakable financial fakery too? lol.
In a world full of accounting deceit, those who are honest gets killed first, so it pays to just swim with the tide… and simply outlast the others in playing this global game of fraud, or play it even better than the rest.
I can’t help being cynical here, but really EVERYONE is cheating, so being honest within a wholesale system of fraud means you agree to being the patsy :-
– Central Banksters cheat by printing gobs of free money
– Governments are in cahoots with CBs to steal everyone’s purchasing power via the hidden tax of inflationary fiat money
– Big corporations and their managers game the system too with all sorts of financial magic tricks, window-dressing, tax planning, profit offshoring, transfer pricing etc.
– Ratings companies and the Audit oligopoly feign ignorance too with impunity (or at most relatively small fines vis-a-vis the fees they are getting ;)
– the stock market brethren consisting of pension funds, mutual funds, hedge funds HFTs, front-run, back-stop, does insider trading, outsider dealings, Over-the-Counter trading, Under-the-table darkpools …
well, you know…all the usual besides the straight and the narrow path.
So you are damned if you do, and damner if you don’t. lol
The only honest thing to do is to leave the system.
And no, it’s not easy, but it is doable.
And the more good people who leave, the faster the system collapses, which in the long run is the best thing.
Gee, I don’t know… how does one do a John Galt?
To be honest man (or rather TruckMan :), I can’t last 2 weeks in the woods without my fridge and the convenience of running tap water.
I would probably go batshit crazy if I ran out of toilet paper and I can’t get a proper shower for like a week. lol.
And I’m fit and healthy now, but I have close relatives that need various medication.
They cannot last 24 hours without their doctor’s prescriptions.
Ayn Rand would be a like a bad joke for them. ;)
I’ve said this before… we all know the system is sorely broken, but the problem is there is NO viable ALTERNATIVE right now or the foreseeable future; so until there is a workable alternative to fiat paper money, I’m guessing we all have to just go along for the ride.
These outsourcing companies have been ripping off the government for years. Rather than pay a big mark up to these companies (30% at least), the government should employ these people from Interserve, save a fortune in money.
WE don’t do that any more – that’s horrible socialism and as you know that’s only good when it benefits the wealthy (although spending on civil servants who serve in the military is OK because that perpetuates the policy of continuous war – money much better spent than on teachers, say).
They have not been ripping off the Government. The Government set up complex tendering systems which means it’s impossible for the local electrician to get the contract to change a school’s lightbulbs anymore. So some rip-off merchants like Interserve get the contract, charge $50 to change a single bulb because their contractor has to come from 50 miles away. But actually, that contractor sub-contracts to the local electrician, who gets paid 20% less than he got before (and will like it, or else), and Interserve trousers the difference, 5% of which gets paid to the Minister for a ridiculously generous public speaking fee at another of the conglomerate’s companies so it’s not too obvious. And if that wasn’t bad enough, those lighbulbs are in a shuttered school that was only open for 5 years but the Government is still paying for for another 20 years under a PFI contract. This is a genuine example I know about.
The people being ripped off are the taxpayers, by their own Government and their mates in industry.
The UK is a third world country; do not kid yourself otherwise.
They drive a hard bargain when they want to though, even managed to get the Brexit withdrawal agreement written for them for free, according to some; and look at the backstop, they’ve done even better there and turned a clause that doesn’t exist in the Good Friday agreement into a veritable industry ! I must admit that at first I had my doubts, but I am now thoroughly convinced that they are actually up to something.
Thank goodness the UK is politically and economically stable…this will buff right out.
Wow! Do you think this is a barometer of things to come? A start of the Debt implosions?
Britain certainly does have its problems with corporate corruption. They ought to consider the possibility of doing something about that before the place implodes, on the off chance that it’s not already too late.
Just kidding. Old Blighty is entering the final stages of the collapse of its empire and its social order under the sheer weight of its long-entrenched corruptions, and is destined to fragment into a collection of city-states, all battling each other to the death over whatever remains.
Interesting to put 100% of blame on “corporate corruption” without even mentioning the political corruption required to make/allow it to happen.
Old Chinese proverb: you can’t pick a turd up by the clean end
Corporatists are greedy and corrupt by their nature. Governments are not unless they are governments of the greedy and corrupt. Governments do not make corporatists corrupt. Corporatists make governments corrupt.
Naturally the perpetrator blames the victim. Not even a good try.
Lots of government leaders & their supporting weenies (Cuba, Russia, Venezuela, China, Hatti, India, Brazil, South Africa…) tend to get rich after they are in office. But maybe I’m wrong and it’s pure love, but lots of countries sure look like they steal lots of money.
I’m sure Russians could vote Putin out any time they get tired of him & his crowd.
Just a natural result of ‘light touch’ regulation, all part of the neoliberal agenda of the past 40+ years.
Doesn’t require political corruption – just political buy-in to a (now completely unquestioned) mantra that “what’s good for corporate profits benefits all society”, a line that has been pushed by lobbyists for a long time – and is a lie – because it doesn’t (eg laying off workers increases short-term profits , thus pumps a company’s stock price and hence its value but it certainly doesn’t benefit society).
Look up the Braham Seer. Pretty much what he said hundreds of years ago .
Thank you Don , great article.
.. just another Vanilla case of wealth transfer from mum and dads investors to the big end of town otherwise known as fat cats!
Nothing to worry about I guess!
Obviously the first blinded group hasn’t reached the maturity required to take custody of their life’s earnings!!!
Just wait for the upcoming IPO’s to see the amount of stupidity that average punters can display when bombarded by the BS dishes out by the likes of J P Morgan .
It’s is going to be colossus :}
The knock-on from the failing contacts is not just a return to the status quo. The UK Probation Service outsourcing has recently collapsed..and the remaining staff are now handling twice the high risk cases compared to the old limit.
And knife crime keeps rises..wonder why?
re: And knife crime keeps rises..wonder why?
A: (Just a guess, actually) You’re letting the wrong people out on parole?
They’re all the wrong people ;)
Actually, most of the problem is that they aren’t even catching them in the first place. Murder clearance rate in London is down from 93% to 67% in two years. Rape clearance rate is down from 13% to 7%, and it is estimated only 10% of rapes are reported to Police.
The average rape case takes 15 months to investigate and come to court, which is staggeringly inefficient, which is why they can now pay less than 30,000 Police officers, which is why there are more rapes, etc. Lot of people being paid to push the paperwork around though, and lots of money for lawyers challenging that paperwork at every stage.
Does this article say that a majority of shareholders voted to reject a deal where they were diluted down to 5% of the new company’s stock in order to instead be in a deal where they are wiped out? Just curious, last time I checked, 5% of something was worth at least a little more than 0% of the same thing?
Maybe they thought they could get a better deal, such as 10%?
at this point of the game are there not tax advantages to getting 0 ?? Like claiming high point of the year values Etc.
“business model that has made a very small few fabulously rich while saddling future generations with huge amounts of debt for increasingly shoddy public services the private sector is no longer able to provide.”
Please don’t tell me that anyone believes this was an accident? When the very small few have enough money to rig the system in their favor, this is what happens.
The long term effects of this mean that investing in whoever makes those yellow vests is probably a good idea.
Don’t worry Truckman, the epidemic of “Knife Crime” is almost over!
Not only has the MoD announced that they are ready to step in to help the Police, there’s a proposed bill that will make installing GPS trackers in every knife sold mandatory!
No, I’m not joking.
Slightly OT. I’ve worked with a number of large IT outsourcing firms and they all have two things in common: waste and incompetence. This is evident even when the outsourcers are hardware brand names, like HP or IBM. Here’s the problem, though. I also know of several small and nimble locally based companies who can do the work required for a fraction of the cost, and aren’t allowed to because the government is too afraid to invest in their own SMEs. “How can I trust *you* [translation: you tiny yet highly-trained and highly-motivated handful of managers and developers] to do a better job than Accenture/HP/SAP/IBM/etc ?”
I’m sorry for all the people put out of work in clusterf*cks like this, but I’m hoping against hope that it may eventually lead to a renaissance of what used to be called “corporate gazelles”. Remember those? I hope to start one of them in the forseeable future. SMEs are the lifesblood of any economy.
Because smaller IT shops can’t offer the kickbacks, no-fault butt-covering if things go wrong (“I hired big company X, who could have guessed they’d screw it up?”), or post-gov employment opportunities for managers that the bloaty big shops can. Quality of work that can’t be measured on a numbers-moron’s spreadsheet doesn’t count at all.
I’m currently dealing with trying to integrate contractor developers from India into our IT operation and it’s been hell. They can’t seem to handle without difficulties even basic stuff like VPNs, remote connections, domains and passwords.
I used to manage Indian middleware integrators, so amen brother! I’ll buy you a beer and we can laugh/cry over the realities that slay us.
Unfortunately the incompetence appears to be a useful selling point as far as releasing the UK government of responsibility while at the same time achieving certain unstated goals. People tend to have their pet grievances, and my own is the UK passport service and British nationality law. Now I was never really interested in either until they both stopped working. I am not talking of where others maybe unfairly benefit, but where nationals are punished. The nationality law part is just an example of legaleese absurdity stretched to incoherent limits of logical fallacy that I will spare any half reasoned person the distress of reading.
Up until passport issuance was centralised to the UK and outsourced, when abroad renewal was a somewhat personalised service at the local embassy or consulate, you had people there to hold responsible. It worked well. After the handling of applications was outsourced to CSC (and remember this is for nationality and passports – being British or not, being able to travel, meeting foreign legislation while abroad etc. important with a capital I to most people I think) , well there were several scandals e.g.
and delays. A family member for example was told, when verifying a specific detail, to apply and that an application was in order. So after much work assembling the nescessary information and documents, paying, waiting, the application was rejected without recompense due to initial faulty advice. That is incompetence at least, just as any explanation or service by UK authorities on these topics are stonewalled. Well at least they don’t purposefully send people the wrong way out of destructiveness as other countries do sometimes, or at least they are more subtle at it if they do.
There is an irony for us in the above story, as an in law worked for Raytheon overseeing the installation of a radar defence system in Saudi Arabia (CSC also being previously partnered with Raytheon in a way). He was a dedicated technician who was also responsible for training local staff on the system. Apparently they just would not learn, even those supposedly already trained in electronics or computer skills. Worse was that though he was basically a superior to those he was training, the relationships actually ended up the other way round due to local culture, and he spent his time covering for the lack of effort and inabilities of his apprentices.
So we ended up with this UK/corporate style management messing us up on the one hand, and watched a dedicated employee being taken advantage of on the other (and sure pay was good for him, but we are talking ethics first here).
As a whole it is all a disgrace.
There used to be a saying, “No one ever got fired by buying IBM”.
Just a cute story; an IBM engineer told me many years ago that when IBM introduced the first adding machines they would send a technician to the purchaser about 18 months after purchase and offer their latest upgrade which would make the machine run twice as fast. Everyone in the office was told they needed to vacate the premises for at least an hour as the upgrade was a very delicate operation. After making sure no one was around, the technician took the cover off the machine and moved an elastic band from one flywheel to a larger flywheel that was already in the machine. He put the cover back on and lit up a cigarette. About 45 minutes later the employees were allowed back into the office. And, Wala, the machine ran twice as fast.
Why would shareholders reject 5% of something to all of nothing ?
Well they would, when if the banks were allowed to take over, they would run the business and fatten it back up for sale with the help of friendly government contracts. In administration, the banks cannot bid and the administrator must sell at the best price. And who is best positioned would buy a defunct business? The previous owners of course, cause they know everything!
Big banks can’t run themselves, so highly unlikely they can “fix” failed business.
Big banks periodically discover that not only can’t they properly underwriting mortgage loans, but they can’t run REO (real estate owed = foreclosed property).
“public services the private sector is no longer able to provide.”
I’d like to quibble with the wording a bit. This wording implies some sort of capacity or capability issue.
Rather than a natural consequence of the privatization cannibalization cycle, wherein the low -hanging fruit has been plucked, the goose fully strangled, and the underlying services duly sucked dry and destroyed by piracy, at which point, the privateers gladly dump it back on the public – because they CHOOSE to no longer provide the service.
It is of course hilarious, because it was not long ago that the same services were privatized under the mirror rationale: justifying privatization of “public services the PUBLIC sector is no longer able to provide.” So we’ve come full circle.
“the rising risk of local authorities taking contracts back in-house.” You make it seem that the local public enterprises/cooperatives/governments that take these contracts are somehow more “risky” than the Thatcherite/neoliberal “off-sourcing” that is increasingly more costly and more shoddy in terms of service for these same local publics. Enough of the already wealthy enough getting more! Time to swing the pendulum way over the other way. Think Preston.
I do enjoy watching (fake) capitalist dueling themselves to death.
For as long as the harshest punishment for a government official is being given a golden watch ahead or prescribed retirement age (and for that one would have to be exceptionally dumb or unlucky), the vast misappropriation of taxpayers funds will go unabated.
Since no party or ruling ideology has any plans to introduce financial or custodial penalties, proportional to damage caused (to people) by such officials (whether through stupidity or corruption), and even Duterte didn’t get far with his strictish measures, it will be just the same old same old, ad infinitum.
Governments don’t work for people, or for their benefit, one must keep that in mind.