The move will allow hedge funds Emerald, Cerberus and Angelo Gordon along with lenders including RBS to take control of the company without the agreement of shareholders if Interserve loses a crucial vote on a debt-for-equity swap on March 15.
It would mean the company, one of the UK’s biggest government contractors, could continue trading, protecting in the short term the jobs of its 45,000 UK staff and enabling it to maintain services such as nursing in people’s homes as well as the cleaning and maintenance of hospitals, prisons, schools and jobcentres.
The company employs 65,000 people worldwide and earns two-thirds of its £2.9bn annual revenues from the British government. It is fighting for survival after warning of a multimillion-pound cash shortfall by the end of the month that could disrupt payments to subcontractors, employees and pensioners and threaten the delivery of essential public services.
Interserve’s market capitalisation of £27m is dwarfed by its £738m net debt. It also owes a substantial instalment on the £80m in interest that is due this year.
One banker close to the talks said the company had learnt the lessons of Carillion, the rival government contractor that collapsed in January last year.
“This is not going to be a Carillion-style collapse, so the 45,000 UK employees of this company should all be sleeping comfortably,” he said.
“If the transaction is voted down, a pre-pack will occur on Monday and business will carry on as usual,” he said. “All the work has been done in advance. The new Interserve will emerge with considerable strength, regardless of the outcome on Friday.”
Interserve’s management, led by chief executive Debbie White, will step up its charm offensive this week as it seeks to win support for its proposals from the company’s smaller shareholders, which include Hargreaves Lansdown and Standard Life. Under Interserve’s plan, the creditors would take over the business in a £480m deal that would see lenders swap their debt for equity in the company.
Coltrane Asset Management, the US hedge fund and largest Interserve shareholder with 27 per cent of voting rights, is opposing the proposals and has threatened legal action. It demanded the meeting this week to vote against the company’s plan amid concerns that shareholders would be left with just 5 per cent of the company. The value of Coltrane’s shareholding has already slipped from an estimated £25m to £3m.
Coltrane has proposed an alternative deal, which would see it underwrite a rights issue and inject emergency liquidity into the company. It has also called for the removal of Glyn Barker, Interserve’s chairman, and most of the rest of the board. Coltrane declined to comment.
It is understood that companies such as Emerald, a private equity vehicle backed by the Scottish pub tycoon Alan Macintosh, stand to make millions after buying about £140m of Interserve’s debt in the secondary market last year for as little as 50p in the pound.
Institutional Shareholder Services, a proxy adviser, has rallied behind Interserve’s management on the grounds that the debt-for-equity swap will “avoid potential insolvency”.
Glass Lewis, another proxy adviser, also backs Interserve. It said on Friday that Coltrane had failed to engage with debt holders and the hedge fund’s proposal would require creditors to “write off a significantly larger part of their debt” than under Interserve’s deleveraging plan. Glass Lewis argues that management has owned up to key problems, such as an over-levered capital structure, and there is no time to agree an alternative strategy.
Many institutional investors automatically follow the voting recommendations of proxy advisers while others use them to complement their own analysis, which often gives proxy advisers a decisive role in boardroom battles. Standard Life, which holds 4.6 per cent of the company, has indicated its support for Interserve’s management.
Interserve ran into trouble after a series of ill-timed acquisitions, lossmaking contracts and a disastrous venture into energy from waste plants. It is paying out more than three times its stock market valuation in fees to negotiate the proposed emergency refinancing to City advisers including Rothschild investment bank, Numis, the broker, Ashurst, and Slaughter and May, the legal firms. The £90m in fees is equivalent to the cash that the company will be left with if the £895m restructuring is successful.
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