Interserve (IRV) has entered administration after management lost a crucial vote over its controversial deleveraging plan, and the shares have been suspended.
Votes representing 59 per cent of the issued share capital voted against the debt-for-equity swap, despite the outsourcer's management warning in late February that failure to approve would force the group to default on its substantial debt obligations.
Interserve’s largest shareholder US hedge fund Coltrane Asset Management and Farringdon Capital Management – which owned 26 and 4 per cent of the outstanding shares, respectively – spearheaded the opposition, with the former requisitioning a general meeting to propose firing all of the directors except for chief executive Debbie White in February.
Shareholders representing 56 per cent of outstanding share capital turned out to vote and Investors Chronicle understands that outside of Coltrane and Farringdon, 95 per cent of those voters supported the deleveraging plan.
The crux of the dissent was that it would lead to a substantial dilution of existing shareholders. The original plan would have diluted holdings down to 2.5 per cent of the overall issued share capital, although a later proposal would have left them with 5 per cent.
In the run-up to the vote, Coltrane proposed to underwrite a £110m rights issue for the group, while converting £435m of debt into equity. It said this would leave existing shareholders with 37.5 per cent and creditors owning 55 per cent.
Interserve rejected the proposal. In a statement responding to Coltrane, Interserve’s board said the hedge fund had refused permission to share the plan with lenders, bonding providers or the pension trustee. The board also said Coltrane’s proposal was “non-binding and unfunded and remains subject to due diligence”, adding that there was “no certainty” it could be implemented.
What remains unclear is why Coltrane and Farringdon voted down the deal, knowing that doing so would reduce the value of their holdings to nothing.
“[Coltrane's] strategy doesn’t seem to make too much sense from the outside,” said Laith Khalaf, senior analyst at Hargreaves Lansdown. “Perhaps there’s more to it than meets the eye,” he added.
Coltrane and Farringdon did not respond to requests for comment.
What happens now?
Interserve’s administration process is very different from the liquidation Carillion underwent in early 2018. Only the holding company has gone into administration, while the underlying businesses have transferred into the ownership of the lenders and continued trading. Restructuring might take place in the future as the new owners try to make it more profitable, but for now the message seems to be business as usual. Indeed, the next working day after the group entered administration (Friday 15 March 2019) it announced £76m in new contracts with the Abu Dhabi National Oil Company.
Unfortunately for retail investors, the prevailing opinion seems to be that there is little shareholders can do to recoup their losses. James Nicholls, consultant for law firm DPP Business and Tax, warned any attempts to seek recourse from Interserve’s directors or other shareholders were unlikely to be successful.
“Do not be suckered into throwing good money after bad,” he said.
Mark Bentley, director at investor society Sharesoc, agreed, saying he couldn’t think of a “practical route that individual shareholders could go down for recompense”.
Interserve’s failure is likely to strengthen public criticism of the outsourcing sector but, counterintuitively, may present an opportunity for the other players in the field. Interserve rivals Mitie (MTO) and Serco (SRP) have both reportedly been exploring the possibility of purchasing its support services division, although neither company would comment publicly.
Speculation has mounted as to whether we'll witness more business failures in the sector. At the time of writing, 5.9 per cent of Mitie’s issued share capital was being shorted, according to Castellain Capital’s ShortTracker, with the most substantial short stake held by Coltrane Asset Management. The hedge fund also owns a 0.31 per cent stake in Capita (CPI), of whose issued share capital 3.8 per cent is being shorted.
