“I voted for Donald Trump,” said the representative for Coltrane, flippantly, when asked after Interserve’s shareholder meeting how he cast the New York hedge fund’s critical 27% stake in the outsourcing firm. Maybe he did, but in this case he voted against a board-backed rescue deal and helped to send into administration a company employing 45,000 people in the UK.
Rapid corporate re-invention, via a pre-pack arrangement in which Interserve’s lenders will take control and operations will continue, is a saving grace from the government’s point of view. So, too, the easy the transfer of the pension fund to new Interserve. But the Cabinet Office’s beloved outsourcing model, in which almost £200bn of goods and services are bought from private companies each year, has received another blow, 14 months after Carillion’s collapse.
One minute, these companies are making so much profit they stand accused of ripping off the public purse; the next, they are going bust. What’s going on?
In the case of Interserve – a company that does probation work, provides school meals and cleans hospitals – the deep problems have little do with the government’s post-2010 austerity programme that forced contractors to accept lower profit margins (and produced poorer public services, many would say). That backdrop was unhelpful but, as at Carillion, the calamity was mostly created in the boardroom.
The problems stem from a wrong-headed adventure into energy-from-waste incineration plants after 2011. The company signed contracts with open-ended liabilities, used untested technology and lost control of its subcontractors. Its bill runs to about £300m.
Shouldn’t the balance sheet still have been able to cope? Yes: businesses with public sector contracts should be built to last. In practice, Interserve was infected with the industry-wide optimism that led boards to believe they lived in a low-risk world in which returns could be juiced up with debt. After the energy-from-waste disasters, Interserve was a company with operating profits of just £93m last year trying to support £815m of gross borrowings. Those numbers don’t work.
The desperate and belated attempt to fix the problem became a saga in itself. Coltrane’s fury was fuelled by the sight of other hedge funds – those who had bought parcels of Interserve debt at as little as 50p in the pound – getting the better end of a proposed debt-for-equity rescue. Resentment ruled and now a pre-pack administration, in which shareholders will get nothing instead of a 5% stake in new Interserve, has followed.
Coltrane can rage against a board it viewed as doing the lenders’ bidding but, ultimately, it made a bad gamble. In a post-Carillion world in which companies are expected to have solid balance sheets, shareholders get whacked first. Other big contractors had already got the safety-first message. Capita and Kier, less troubled businesses, raised cash from their shareholders last year via rights issues.
In that sense, one could say the system is working: after Carillion, contractors are making themselves more robust. The Cabinet Office, though, should not relax about Interserve. The debt-speculating hedge funds who annoyed Coltrane will now become some of Interserve’s biggest shareholders.
Maybe, against form, they will turn into the cuddly, long-term-minded investors that ministers prefer. But don’t bet on it. Some of the nation’s probation services will now be provided by a company part-owned by one hedge fund, Cerberus, named after the three-headed hound of Hades. The fit looks less than perfect.
