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Interserve: Key UK contractor faces crunch vote on rescue plan

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Interserve has a cleaning contract for Network Rail stations

Key government contractor Interserve faces a crunch vote on Friday which could lead it into administration.

The outsourcing giant has been trying to persuade shareholders to back a rescue deal which would see 95% of the firm pass to lenders.

It reached a deal with creditors last month to prevent its collapse.

But if shareholders reject its debt-for-equity-swap plan in the vote, Interserve’s lenders could apply for a pre-pack administration.

This would mean the firm would avoid a Carillion-style collapse, but it would wipe out existing shareholders.

A pre-pack administration lets a company sell itself, or its assets, as a going concern, without affecting the operation of the business when administrators are appointed.

The administrators take over the running of the business to protect creditors.

In a pre-pack, the lenders take 100% of the business.

Like construction giant Carillion, Interserve has numerous public sector and infrastructure contracts. Carillion collapsed in January last year with debts of £1.5bn.

What is Interserve?

The outsourcing firm is one of the UK’s largest public services providers, and employs 45,000 people in the UK.

It started in dredging and construction, and from there has diversified into a wide range of services, such as healthcare and catering, for clients in government and industry.

It sells services, including probation, cleaning and healthcare, and is involved in construction projects.

It is the largest provider of probation services in England and Wales, supervising about 40,000 “medium-low risk offenders” for the Ministry of Justice.

Its infrastructure projects include improving the M5 Junction 6 near Worcester, refurbishing the Rotherham Interchange bus station in Yorkshire, and upgrading sewers and water pipes for Northumbrian Water.

And at King George Hospital in east London, for instance, Interserve has a £35m contract for cleaning, security, meals, waste management and maintenance.

Both the rescue deal and the pre-pack administration are designed to keep those contracts going and jobs in place, at least in the short term.

Analysis

BBC business editor Simon Jack

Interserve, one of the government’s biggest providers of public services, may go into administration later.

The firm is holding a crucial shareholder vote to decide whether to accept a rescue plan which would see its lenders write off hundreds of millions of pounds in debt in exchange for new shares.

It employs 45,000 people in the UK and relies on contracts to serve schools, hospital and the army for 70% of its revenue.

The company is drowning in £650m of debt and its woes have invited comparisons with failed contractor Carillion which went bust just over a year ago.

However, the government – which put Interserve under intense supervision 18 months ago – insists that if the rescue deal is not approved and the company does go bust, there is a plan to bring the company out of administration over this weekend.

This arrangement will see the lenders take control of the company, essential services will not be interrupted, but current shareholders will see their shares rendered worthless.

That includes the company’s biggest shareholder, US firm Coltrane Asset Management, which has opposed the deal but is thought to be interested in buying pieces of the company after administration.

Whatever happens on Friday, the financial disaster at Interserve is certain to revive the debate around the role of the private sector in providing public services.

Debt problem

Interserve accumulated a pile of debt which it struggled to pay off after construction project delays and a failed push into energy-from-waste in Derby and Glasgow.

Its rescue plan involves cutting its debts from nearly £650m to £275m by issuing new shares. These will then be swapped with creditors for debt.

If shareholders vote for the rescue deal, which would hand the lion’s share of the firm to lenders, it would leave them with heavily watered-down shareholdings.

Lenders would be left with 95% of the firm.

Interserve’s largest shareholder, Coltrane Asset Management, is critical of the proposed deal and has threatened to block it.

The New York-based hedge fund has been pushing for a deal whereby 55% of the firm goes to lenders, 7.5% goes to other shareholders, and the rest goes to Coltrane.

Share plunge

Under its proposed rescue deal, Interserve gets to keep its most profitable division, its RMD Kwikform construction business, loading £350m of debt onto its balance sheet.

The firm had considered spinning the unit off to its lenders to raise money.

This is the second rescue deal for Interserve, with the company refinancing its debt in March last year.

The firm’s shares have plunged over the past year, currently trading at 9.6p each. Just over a year ago, the shares were worth 100p each.

Following Carillion’s collapse, the government launched a pilot of “living wills” for contractors, so that critical services can be taken over in the event of a crisis. Interserve is one of five suppliers taking part.

Union response

The RMT union said that events around Interserve suggested the current business model of using outside contractors for public services was “broken”. The RMT said the Interserve contract to clean and service railway stations in the southern section should be brought in-house by Network Rail.

General Secretary of the RMT Union, Mick Cash, said bringing the contracts in-house would “avoid a repeat of the Carillion chaos.”

“‎Once again we see the reality of bandit capitalism and its toxic impact on our public services. The time has come to end this obsession with the private sector speculators and return to the principles of public services run and owned by the public, free from this corrosive nonsense,” he said.



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