Outsourcer Interserve sold out of administration by EY

19 March 2019 Consultancy.uk

Administrators from EY have overseen the fire sale of Interserve, after the outsourcer finally collapsed following a year of poor trading. The plight of Interserve has been well documented over the last year, but despite issuing multiple profit warnings, the firm was handed public contracts worth hundreds of millions of pounds prior to its demise.

In mid-March, one of the UK's largest providers of public services, Interserve, fell into administration following a turgid 2018. The firm’s shares had tanked sharply as shareholders reacted badly to a rescue plan for what has proven to be a protracted crisis for the company, which had also accumulated debt after construction project delays and a failed energy-from-waste project in Derby and Glasgow.

The largest holder of Interserve’s stock later came forward with a counter-proposal to the initial solution from lenders, which it labelled “an obscenity”. The revised suggestions included a £75 million rights issue, and it was thought unlikely that lenders would accept it – particularly as Interserve’s lenders were understood to have lined up Big Four firm EY to manage the firm’s administration. This proved to be the case, as shareholders voted 59.38% against a rescue plan to address Interserve's mounting debt pile, as the deal would have seen lenders handed the bulk of the business. 

Outsourcer Interserve sold out of administration by EY

After the vote, though, Interserve said that "in the absence of any viable alternative" it would formally apply to the High Court to go into administration, and EY was formerly appointed to oversee the process. Interserve previously boasted a revenue of £3.2 billion in 2015, and a workforce of more than 75,000 people worldwide – 45,000 of whom are based in Britain. Thanks to this, and its proclivity toward picking up lucrative government contracts, EY was able to quickly secure a pre-pack sale for the firm, with its assets moving immediately to a group controlled by Interserve's lenders.

The lenders who are now in control of Interserve Group include banks RBS and HSBC, and investors Emerald Asset Management and Davidson Kempner Capital. Ironically, this is precisely what shareholders had hoped to avoid by defeating the initial rescue plan, but they have now seen the value of their shares wiped out under the financial restructuring. Interserve’s deal avoids a Carillion-style collapse, and the company has also insisted that the deal will protect services and jobs.

In a statement following the sale, EY administrator Hunter Kelly said, "This transaction secured the jobs of 68,000 employees, the majority of whom work in the UK, as well as ensuring there was no disruption to the vital public services that Interserve provides to the UK Government."

Debbie White, chief executive of Interserve Group, added, "Interserve is fundamentally a strong business and with a competitive financial platform in place we see significant opportunities ahead as a best-in-class partner to the public and private sector."

“Obsessed” with outsourcing

The UK Government will be particularly relieved at the news, as the company brought in roughly two-thirds of its £2.9 billion revenues last year from thousands of government contracts. These include hospital cleaning, school meals, the maintenance of some overseas military bases and running parts of the probation service. Like defunct outsourcer Carillion, Interserve was handed hundreds of millions worth of public contracts in the run-up to its administration, according to the GMB union.

According to UK paper The Mail on Sunday, meanwhile, an internal Whitehall strategy memo showed civil servants had put together a proposal to create a state-controlled company in the event that Interserve went into liquidation, and that Government was to prepared to move staff. However, the pre-pack arrangement reached will allow Interserve to carry on the same work, including the biggest contract it was awarded last year – a £66 million deal with the Foreign and Commonwealth Office to run facilities management services.

Though trouble seems to have been averted for now, Rehana Azam, National Secretary of the GMB, told The Guardian that the case showed how “obsessed” with outsourcing the government had become. She added, “Awarding hundreds of millions in taxpayer funded contracts to troubled outsourcing companies is the height irresponsibility… Interserve was clearly in trouble, and yet ministers saw fit to hand it hundreds of millions of pounds of public money. What on earth were they thinking?”

As usual, the Government has responded to the criticism by claiming outsourcing allows it to carry out public service work for less money. A Cabinet Office spokesperson said, “Our priority is to deliver quality public services while ensuring value for money for taxpayers. The awarding of contracts follows a robust process, including financial checks, and we are reforming our approach to outsourcing, so that services are set up to succeed. The refinancing process that Interserve executed led to the smooth continuation of public services and safeguarded thousands of jobs.”


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