The chairman of ailing government contractor Interserve has issued a stark warning that the company will “run out of money” and collapse into administration if shareholders do not back a rescue deal that will be put to them on Friday.
The debt-laden company, which has thousands of government contracts to clean hospitals and serve school meals, is at the centre of a standoff between creditors and shareholders over its future. Its precarious position comes a year after the collapse of fellow outsourcer Carillion, a saga that has cost the taxpayer an estimated £150m.
“I am very worried,” said Glyn Barker, its chairman, in a weekend interview before the crunch vote on its financial restructuring. “We’ve got nowhere to go – we run out of money and the banks will exercise their security.”
Interserve employs 45,000 people in the UK and earns two-thirds of its £2.9bn turnover from British government contracts. The Reading-based firm is one of the main builders of new schools and the largest provider of probation and offender rehabilitation services in England and Wales. Other work includes maintaining military bases in the Falklands.
The company has been laid low by an ill-judged acquisition spree, loss-making contracts and a disastrous foray into energy from waste plants. The problems have taken their toll on its share price which has slumped from 685p five years ago to 14.6p, valuing the company at a mere £22m.
At Friday’s extraordinary meeting shareholders will vote on the debt for equity swap drawn up by its lenders, a group that includes hedge funds and major UK banks such as RBS and HSBC. The plan would reduce Interserve’s £631m debt pile by three-quarters but result in the group owning 95% of the company.
To succeed, 50% of voting shareholders must back the deal – and it could go to the wire. Interserve’s largest shareholder, US hedge fund Coltrane Asset Management, with a 27.7% stake, intends to vote against the deal as does Farringdon, another hedge fund, which owns nearly 6%. Standard Life, which holds almost 5% of the company, has indicated its support for Interserve’s management team led by Debbie White, its chief executive.
Coltrane has described the restructuring plan as “terrible” because it so dilutes their position. It has suggested an alternative plan that would result in shareholders being left with 10% – rather than just 5% – of the equity.
In a boost for Interserve’s board, the influential proxy voting firms Glass Lewis, Institutional Shareholder Services (ISS) and Pensions and Investment Research Consultants (PIRC) have rallied behind the outsourcer’s deal.
In its note Glass Lewis described the terms as “reasonable” and the “only viable option for the company to avoid a loan default at this time”. “Overall we believe it will enable the company to significantly reduce its outstanding debt,” it said. “The deleveraging plan should bolster the company’s efforts in normalising relationships with its clients and stabilising its operations.”
If shareholders do not back the plan Barker said he expected the company’s lenders to call in a £66m loan which the company would not be able to repay. “People shouldn’t assume that there are months or even weeks [left] without additional borrowing facilities,” he told the Sunday Telegraph. “If we lose, we run out of liquidity.”
The standoff has seen the lenders plan for the worst. They have lined up EY to handle a pre-pack administration that would wipe out the shareholders but enable the business to continue to trading as normal. People familiar with plans suggested if the vote was lost the company would be put through the swift insolvency procedure on the Monday. The process would enable the company to continue trading, with no impact on the delivery of its contracts or the jobs of employees.