Last week Interserve, employer of 80,000 cleaners, carers, probation supervisors and construction workers, warned things were awful. So bad that second-half operating profits would be half what they were last year and the business was likely to breach its banking covenants. The shares fell 25 per cent.
They had already been halved by a board warning that something was amiss last month. Since then Debbie White, its new chief executive, and Mark Whiteling, even newer finance director, have been sweeping through Interserve’s numbers. So much ordure is oozing out, Interserve could be the mythological Augean stables, home to thousands of prize cattle, which Hercules was employed to clean.
Interserve’s shares are now about 67p, less than a tenth of where they were in 2014 when the group bought Rentokil’s office cleaning business for £250m. The group is worth less than £100m now. It looks to be in a worse state than Carillion, its fellow construction-outsourcing business that has become a byword for the sector’s habit of borrowing heavily, over-bidding for contracts, aggressive acquisitions and opaque accounting. Carillion’s shares have fallen from 350p to under 50p in three years and its net debt is three times the value of its equity. Interserve’s net debt will be £500m by the year end. That is five times the current value of its equity.
On Thursday, Interserve’s new brooms presented a picture of a sprawling business trading on below-average margins brought ever lower by rising costs and plunging revenues. Employment costs are rising and inflexible, made worse by increases to the National Living Wage. Margins have been hit by heavy start-up costs on contracts — so-called “contract mobilisations”. The building division has been hit by delays and penalties. The company is making further provisions of £35m. That is on top of the £160m provision made in 2016. There will also be a £35m cash outflow.
Hercules diverted a river to clean out the Augean stables and, according to some accounts, had other help.
Interserve has help too. It is now awash with accountants. Chairman Glyn Barker, having dispensed with the previous chief executive’s services almost a year ago, waited until September to install Ms White and Mr Whiteling. Now, though, he is rushing to aid the newcomers, bringing in PwC, his former gaff, to assist in discussions with banks. And Interserve’s lenders have employed EY to see what they can do. Meanwhile, Ms White and Mr Whiteling are hosing down and sluicing through Interserve’s operating model, work streams and cost base, reviewing the profitability and viability of contracts and businesses. That means closures, redundancies and disposals where possible. It will be a Herculean task. Rival Mitie sold its homecare business for just £2 in March.
The hero Hercules was a child of gods and done and dusted in a day. Interserve’s top team are hardly heroes and cleaning out the company will take years.
The business’s website proclaims: “What’s next for Interserve? The best is yet to come.” We don’t think so.
New year, new revenue rules
One thing missing from Interserve’s statement last week was a reference to the impact of new accounting rules — IFRS15 — on booking revenues, which come in force in January. Mr Barker is described by Interserve as “having a deep understanding of accounting and regulatory issues” and he, as well as three other Interserve directors, trained as abacus rattlers. But all Interserve has issued so far is a two sentence comment that it will review major contracts in the light of the new rules. Which is fine, if terse compared with the page that BT devoted to IFRS15 in its 2016 annual report. Few companies have said much more.
However, Capita’s big reveal last month surprised everyone. It said IFRS15, which will force companies to smooth revenues and match them to services provided, would have reduced 2016’s earnings by a third and wiped out net assets. Ten days ago the Financial Reporting Council wrote to remind boards they must make “quantitative disclosures” about the effects of IFRS15 in their next financial statements. This week, it will step up the reminders. As Deutsche Bank’s Luke Templeman says, few companies have disclosed numbers and “I expect some big surprises at year end”.
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