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Interserve must be bold – and fast

David Price

Interserve has enjoyed a few months of relative calm on the stock market following wild swings in its share price between January and May.

That calm ended yesterday when its shares slid 12 per cent before plummeting a further 30 per cent in early trading this morning.

No new information has come from Interserve in recent days to prompt the sell-off. However, Renewi – its process partner on the Derby EfW scheme – suggested last week that the company faced compensation claims over a missed completion deadline.

As a source close to Interserve’s ongoing difficulties told me, this was seen by some as Renewi setting out its position ahead of a possible dispute over liability; any additional costs for Interserve were far from certain though, the source insisted.

Then this morning there was the BBC’s report in which an unnamed former shareholder drew comparisons with Carillion, while casting doubt that the company would find the cash it needed from new investors.

That’s not the most surprising opinion – every expert I’ve talked to about Interserve thinks it needs a rights issue or a debt-for-equity swap.

Exactly what proportion of Interserve’s share price plunge has been driven by the Renewi update and by the BBC’s report is up for debate.

But one thing that is clear from speaking to industry sources is that their faith in the company’s ability to turn things around is starting to fade.

Chief executive Debbie White and her financial right-hand man Mark Whiteling took home a total of just under £800,000, including maximum bonuses of 125 per cent of their salaries, after being in their jobs for around four months.

Their main accomplishment thus far has been the expensive refinancing deal sealed in March. There have been few positive announcements since then. 

What we have seen is tinkering at the edges in the form of relatively small-scale disposals, pulling back from an increasingly competitive London market, and some internal operational savings.

This would be fine for a company dealing with a moderate loss looking to sharpen up a bit.

But it falls short of the radical action needed to address a net debt of around £600m, as well as financial covenants that require total borrowing to be cut by around £200m over two years.

Recapitalisation through either a rights issuance or debt-for-equity swap must surely be seriously considered, while the sale of its profitable RMD Kwikform business with its tangible assets must be an option as well, something that was considered and then scrapped under former CEO Adrian Ringrose when EfW problems started to bite.

Interserve has tried to limp on without much change, hoping it is big enough to weather the huge EfW provisions and mounting interest costs on its debts. But investors clearly don’t think this can go on much longer.

One analyst told me most long-term investors would have exited and those still holding Interserve shares were either “in denial” about the company’s problems or holding on in desperate hope that things will be turned around.

For its shares to plummet primarily on the back of rumour and speculation in recent days shows how shaky confidence in the company is.

Time is nearly up for Interserve’s management to be clearer on the measures they are taking to address its slide so they can restore confidence.

The contractor issued a statement today in response to media coverage of its share slide, saying its strategy was “on track” and it expected to see “significant operating profit improvement” this year.

Will clients be happy to take this at face value? The current strategy is seeing shareholders head for the door.

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