Out of the frying pan, Inter-the fire: Will Interserve’s rescue deal go up in flames?

Despite taking two months to thrash out a rescue deal, debt-stricken outsourcer Interserve’s future remains precarious. Where does it go from here?

For the last eight weeks, suppliers and investors alike have held their breath, as chiefs at troubled outsourcer Interserve thrashed out a rescue deal with the firm’s lenders. The negotiations were a last-ditch attempt to relieve it from a £650m debt pile, and lift a fog of uncertainty which has been hanging over its 45,000 UK employees since last year. But the moment the plan went live on Wednesday morning, one influential shareholder rebelled, plunging the firm’s future back into uncertainty. City PM takes a closer look.

The plan

The firm’s lenders, which include RBS, HSBC and BNP Paribas, have agreed to help reduce its debts to around £275m by stumping up £75m and accepting £480m in new equity issued by Interserve. But this is at the cost of existing shareholders, whose stake in the company has been all but wiped out. They are left with just 2.75 per cent of the firm. They will, however, have the option to claw that £480m back through a so-called preemptive open offer.

The two months leading up to the announcement were not without their controversies. The Cabinet Office pushed back strongly on a proposal to sell off Interserve's profitable construction arm, RMD Kwikform, for fear it would leave the parent company virtually worthless. With 45,000 UK jobs on the line as well as vital public services from school meals to major construction projects, the government is determined to avoid another Carillion-style collapse.

The stakes were so high that, as one well-placed source said, chief executive Debbie White went 48 hours without sleep in the run-up to the deal's release. “I don’t know how she’s done it, it’s superhuman,” they said.

The problem

But as soon as White could finally get some shut-eye, 27 per cent shareholder Coltrane Asset Management rejected the plan and called for the heads of eight board members. The only person spared was White herself. It is set to approach other major investors in the firm – which include Standard Life and Hargreaves Lansdown – to do the same. A source close to the hedge fund said: “It cannot be right that the hedge funds who own Interserve’s debt double their money whilst shareholders get wiped out.”

And it is not just the terms of the deal that have stoked fury at Coltrane. The source added the level of communication from Interserve’s board had been “consistently poor” for a long time. This feeling intensified in recent months with what Coltrane called “a series of opaque meetings followed by leaks which have had a predictable effect on the share price”.

The board has subsequently “created a problem where there did not need to be one,” the source added, leading to a "catastrophic erosion of shareholder value".

“If you’re not saying things in an accurate way investors will flee the ship because they think it’s sinking,” they told City PM.

So what next?

Interserve needs 50 per cent of votes in favour of the rescue deal, in a ballot likely to happen in mid-March, otherwise it is expected to go into administration. The firm has had no engagement from Coltrane, City PM understands, save for the suggestion of two rescue specialists, David Frauman and Stuart Ross, to replace them. For all the hedge fund's criticism, it has not published any concrete alternative to the deal. As one source said: "The ball is now in Coltrane's court."

At this stage, whether the firm will go into administration or not is anyone's guess. But if Coltrane persuades more shareholders to go its way before the ballot, it will tee up an almighty tussle over the future of the public sector outsourcing giant.