Interserve Administration: I am very angry!

I attended Interserve’s General Meeting today and I am…

…angry with major shareholders, who didn’t hold the board to account and couldn’t be bothered to speak or vote today.

…angry with former board members who, in my opinion, did not properly exercise their corporate governance responsibilities.

…and angry with former executives who drove the Interserve ship onto the rocks… and were still well-rewarded.

In short, a massive failure of corporate governance and corporate stewardship. Those responsible should hang their heads in shame. Government should consider how to make boards and major shareholders more accountable. Instituting shareholder committees, as ShareSoc suggests, would be a good start (though far from a complete solution).

Now I’ve got that off my chest, let me elaborate…

About Interserve and my Involvement

I have held shares in Interserve since 2009 and ultimately sold my holding in 2016/17, as it became apparent that the firm was at risk due to high levels of debt and uncertain liabilities in EfW (Energy from Waste) contracts. As an experienced investor, I had learnt the lesson that investing in businesses with high levels of debt is very risky, if there is any significant doubt about their ability to repay. I actually made a good profit over my holding period, from dividends paid and by trading around my core holding.

As at today, I only had a token holding (held in CREST, ensuring I received shareholder circulars and am able to attend meetings as a registered shareholder).

Interserve is a large UK contracting firm operating in three principal areas: construction; facilities management and plant hire. I find the latter two areas of operation relatively attractive, generating reliable revenue streams and reasonable profits. Construction however has low operating margins and high risks of large construction contracts going wrong. What makes the construction business superficially attractive is that it can require negative working capital, with payments/deposits being received upfront and thus flattering cashflow.

What went Wrong

In simple terms, Interserve became heavily indebted, after “bulking up” through acquisitions. The chairman today stated that whilst the debt level was too high when he took over, it was manageable as long as nothing serious went wrong with Interserve’s businesses, and had that been the case, he wanted to undertake a rights issue, as Kier have done recently, to put the business on a firmer financial footing.

Unfortunately something serious did go wrong. Under the leadership of the previous CEO, Adrian Ringrose and Chair, Lord Blackwell, Interserve took on a number of contracts to deliver EfW plants. The firms’ inexperience in this area was exposed; the contracts overran and the plants did not meet client expectations. As a result, Interserve made significant losses on the contracts and became liable for penalties.

With the benefit of hindsight, entering into these contracts was a huge mistake. A mistake for which Mr Ringrose was handsomely rewarded, receiving remuneration ITRO £7m over the last 5 years of his tenure at Interserve.

..and Lord Blackwell? He is now chairman of Lloyds bank (Lloyds Banking Group plc), one of the largest UK banks. IMO he should consider his position and if he will not, Lloyds shareholders should think seriously whether his track record fits him for such an important role, where risk management is vital, and vote against his re-election. IMO if he is not forced out, that will be yet another massive corporate stewardship failure.

In my eyes this is a huge failure of corporate governance a) that the board did not recognise the risk in these contracts, combined with the high levels of debt that the firm was carrying, and hence veto them being entered into in the first place; b) that they put a remuneration policy in place that allowed Mr Ringrose to walk away with a small fortune, despite the desperate situation the firm was left in on his departure. Rewards for failure should not be tolerated.

As the share price tumbled, in the light of the above issues being exposed, opportunistic New York hedge fund Coltrane Asset Management started buying up shares, ultimately ending up with 27.7% of the company. They were not happy with the board’s recapitalisation proposals and, instead proposed a rights issue that they would underwrite.

Today’s Meeting

Today’s meeting was the last chance to rescue the firm, and hence one of the most important days in Interserve’s history. For that reason (and out of curiousity), I decided to attend, observe proceedings, ask pertinent questions and vote.

The meeting was to vote on a single ordinary resolution which would have recapitalised the firm, by issuing a very large number of shares for cash. Had the resolution passed, shareholders had the option to support the firm by taking up to 19 open-offer shares for each share previously held. Interserve’s lenders had agreed that they would take up any of the 2.84bn open-offer shares not taken up by shareholders (thus underwriting the issue), in return for relinquishing a proportionate amount of their debt. Thus the firm’s financial future was secured, by a substantial reduction of the debt burden, irrespective of take-up of the open offer by shareholders.

For this plan to succeed, a majority of shareholders had to vote in favour of the resolution.

The meeting was held in a large venue near Liverpool Street station and I would estimate that there were around 100 attendees (mostly “suits”). The press was also granted entry, but not permitted to speak.

The chairman began by making a statement, stating that Coltrane’s alternative proposal was not viable principally because a) Coltrane had demanded to do time-consuming due diligence before entering into a legally binding contract; b) there was no assurance that Coltrane could complete the contract; c) lenders were not prepared to wait whilst these alternatives were considered. Therefore, in the event of the resolution not being passed, the board would seek to place the firm into administration, to fulfil their legal obligations (it is illegal for a business to trade if insolvent). The chair stated that arrangements had been put in place such that the operating businesses, which are profitable, could continue to trade even in the event of administration. I take that to mean a so-called “pre-pack administration”.

ShareSoc is generally opposed to pre-packs, because they usually disadvantage shareholders and unsecured creditors in favour of banks and company managements, without giving shareholders an option to intervene. In this case, however, shareholders have no cause for complaint, as they have been given the opportunity to rescue the firm, and a pre-pack that preserves jobs, allows important service contracts to continue uninterrupted and protects suppliers and sub-contractors seems like the best alternative, if shareholders are not prepared to come to the rescue.

In any listed business major shareholders have an important corporate stewardship role: it is their responsibility to hold boards to account, by meeting with management and voting in an appropriate manner. We can see that they had already failed to prevent a remuneration policy being put in place that provided rewards for failure.

Given the importance of today’s meeting, in my view, they also had two key responsibilities:

a) To hold the board to account by asking pertinent questions

b) To vote – and in my opinion the only responsible vote was a vote in favour of the proposed resolution.

As the chairman pointed out, placing Interserve into administration was undesirable:

a) as it would incur unnecessary costs

b) shareholders would lose all value in their shareholdings

c) the reputational damage of the firm being placed into administration would impair its ability to win new business

Given that the only alternative to administration was to vote in favour of the resolution, that is why I consider any other vote irresponsible.

So… what did the major shareholders do? Firstly I asked the chairman whether they were present. He did not know and no one volunteered the information. None of them spoke, not even Coltrane. 

We now know the outcome of the meeting: https://www.investegate.co.uk/interserve-plc–irv-/rns/result-of-general-meeting/201903151233140557T/ Some 60% of shares effectively abstained and, as a result the resolution was not carried.

I will now name and shame the leading shareholders listed in the circular, who have collectively failed miserably to exercise proper corporate stewardship and, as a result will lose all the value in their shareholdings (I do not know how each of these voted individually). They are:

Coltrane Asset Managment LP (27.7%)

Farringdon Capital Management (6.7%)

Deutsche Bank AG (5.7%)

Standard Life Aberdeen plc (4.9%)

Old Mutual plc (4.8%)

Blackwell Partners LLC (4.0%)

They should hang their heads in shame.

Just for readers’ information, I did ask one further question: the circular states that the directors do not intend to take up their entitlements to ordinary shares under the open offer, why is this? Didn’t exactly seem like a vote of confidence in the company’s future! The chairman stated that it depended on each board member’s personal circumstances but that some would take up some or all of their entitlements (had the resolution passed). I take this to mean that some may not have sufficient cash to afford to take up their entitlements (any shareholder wishing to take up their full entitlement would need to find cash equivalent to ~20x the market value of their shares to do so), which is fair enough – if true!

What Happens Next

The answer to that question is contained in a statement by the company issued this afternoon: https://www.investegate.co.uk/interserve-plc–irv-/rns/parent-company-administration/201903151401490627T/

• Trading in the company’s shares is now suspended (they are almost certainly now worthless)
• The firm will enter administration
• The group will be sold to a new company, (a pre-pack) which will allow the operating subsidiaries to continue trading

Please post any comments/views below!

Mark Bentley

Director, ShareSoc