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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Debenhams administrator handed legal threat from Sports Direct

24 April 2019 Consultancy.uk

Earlier in April 2019, the long-suffering high street entity of Debenhams finally collapsed into a pre-pack administration, wiping out equity for shareholders including Sports Direct. Now, Mike Ashley, the controversial owner of Sports Direct, has threatened legal action to remove FTI Consulting from its role as Debenhams’ administrators, following the obliteration of his stock in the company.

As the retail sector in the UK continues to endure a torrid period, British retail stalwart Debenhams endured a spectacular fall from grace. The high street ever-present was founded in the early 19th century, with a single store in London, before expanding to 178 locations across the UK, Ireland and Denmark. However, following a string of profit warnings and several rounds of lay-offs, the company engaged advisors from Big Four firm KPMG to consider its options in the Autumn of 2018.

At the time, Debenhams Chairman Sir Ian Cheshire insisted that the chain was not heading for insolvency, or that it was actively embarking on a company voluntary agreement (CVA). Nevertheless, Debenhams fell into administration in Spring 2019. The news saw Chad Griffin, Simon Kirkhope and Andrew Johnson of FTI Consulting appointed as joint administrators, immediately selling the retailer to a newly incorporated company controlled by secured lenders.

Debenhams administrator handed legal threat from Sports Direct

The pre-pack administration deal meant Debenhams was able to access significant additional funding, preserving 165 of its stores, though plans to close around 50 under-performing stores in the next three to five years remain in place. At the same time, the deal maintained its commercial relationships with suppliers, employees and pension holders. However, it also effectively led all of Debenhams’ previous shareholders – including the retail magnate Mike Ashley – to lose their equity.

Ashley’s Sports Direct firm had increased its stake in the department store chain in 2018, but stopped just short of the 30% stake which would require it to put in a formal offer to fully acquire the business. The transaction fuelled speculation that Ashley was waiting for the opportune time to acquire Debenhams, particularly in the wake of his swoop for House of Fraser. Ashley’s deal there enabled Sports Direct to buy the firm out of administration in a pre-pack deal, allowing the new ownership to controversially wash its hands of the company’s pension scheme in the process.

While some believed this was Ashley’s intent for Debenhams, FTI’s decision to sell the store to its creditors has instead resulted in a sizeable loss for Ashley. The hit of around £150 million from his loss in Debenhams comes after an analysis by The Sunday Telegraph suggested the tycoon had accrued “a sprawling web of stakes” in rival companies, and that he may be nursing losses of more than £500 million.

Bad press

Ashley – who recently lost a complaint ruling by British press regulator Ipso allowing the Times to note that he shared many characteristics with North Korean dictator Kim Jong-un – has been outspoken in his contempt for FTI since the news broke of Debenhams’ sale. The Sports Direct CEO has called for the resignation of FTI from its role as administrator, after his stake in the department store chain was wiped out. The Guardian stated that a letter to FTI saw Sports Direct’s lawyers even threaten legal action to remove the advisory firm as administrators because of a conflict of interests.

According to the reports, the document claimed, “[Sports Direct] will do everything available to it to unwind the damage caused to the company and other stakeholders (including large and small shareholders) by the events of today including but not limited to challenging the appointment [of FTI as administrators] and all consequences of it.”

The letter allegedly claims that FTI had been involved with Debenhams since the second week of February, and had engaged with the group’s lenders. The legal team reportedly suggested that this would consistute a conflict of interest, because FTI sold the retailer’s operating companies to the same lenders via a pre-pack administration.

This comes weeks after Sports Direct was itself accused of becoming overly cosy with a professional services firm, which has seen its auditor Grant Thornton placed under scrutiny for its continued role with the firm. In 2018, it was reported that Grant Thornton was set to stand aside from the role due to competition rules. It had held the role since before Sports Direct floated on the London Stock Exchange in 2007, while Phil Westerman, the Partner at Grant Thornton responsible for signing off Sports Direct's accounts, had himself undertaken the work for five years. 

Neither situation is understood to have changed, leading to the questioning of the independence of Grant Thornton’s auditing work with Sports Direct. Such is the level of bad press surrounding the retailer, that the Big Four of the accounting and advisory world – wary of incurring a new scandal of their own – are said to have ruled out taking the contract over.