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Rivals distance themselves as Rok becomes recession’s largest victim

Housing contractor Rok became the biggest casualty of the recession this week after it filed for administration.

After a tough six months that saw it release two profit warnings, suspend its finance director and highlight problems in its plumbing, heating and electrical business, a dramatic fall in trading during September appears to have tipped the new-build and maintenance contractor over the edge. PwC was appointed administrator on Monday.

Rok’s turnover for the year to 31 December 2009 was £715 million, down from more than £1 billion in 2008, but still larger than that of Connaught, which went into administration in September with a latest turnover of £659.6m.

Rok, which had 3,800 employees, flagged issues regarding the profitability of some contracts in its PHE division in April. At the time, Rok said the problem been “dealt with swiftly and decisively”.

Then ahead of interim results in August, the firm said that despite some contracts in the division being terminated, “the PHE business continued to disappoint”. The board instigated a further review.

Business services firm BDO was appointed to review the business, and its investigation found “serious failings in the financial controls of the PHE business”.

The report’s findings resulted in the suspension of finance director Ashley Martin. He was later reinstated after being exonerated of any wrongdoing, only to resign immediately, describing his position as untenable.

According to PwC administrator Mike Jervis, Rok suffered a “sharp drop off in work across all divisions during September”.

It is understood this forced discussions with the firm’s bankers, who withdrew their support, forcing Rok into administration.

But the firm’s problems appear to have run much deeper than initially thought.

One source said: “I’m shocked at the announcement given the statements Rok has been making. They have obviously papered over the cracks but the banks would’ve asked if their debt can be repaid.”

When the housebuilding sector started suffering with the onset of the credit crunch, Rok turned its attention to social housing maintenance work, particularly beefing up its PHE division.

Emma Bridges, director at credit ratings agency Top Service, said this switch ultimately proved disastrous due to government cuts.

She said: “Rok directors tried to scale back on areas they considered vulnerable and concentrated instead on property repair, maintenance and improvement. They particularly targeted the social and privately rented residential sectors.

“Speculation about spending cuts in social housing has had damaging consequences for companies like Rok and Connaught, who targeted these areas because they appeared in 2008 and 2009 to be relatively recession-proof”.

After the high-profile administrations of Connaught and Rok, other firms in the sector moved quickly to distance themselves from the difficulties.

Mears chairman Bob Holt said: “It is a massive insult to be compared to Rok and Connaught. Mears has had 15 years of compound annual growth.”

Osborne chief executive David Fison said: “We’re extremely prudent and hold a lot of cash in the bank as a protection to the family and the people who employ us. We’ve got big reserves to stand by.”

Panmure Gordon analyst Andy Brown said that despite the recession and public spending cuts, many firms in the industry were in good shape.

He said: “I think and hope Rok and Connaught are very specific situations and not the start of a trend. The likes of Morgan Sindall, Kier and Balfour Beatty are all sitting on net cash at the moment, they are all far more diversified and there are barriers to entry for what they are doing.”

However, Leadbitter chief executive Bob Rendell was less positive: “I think it will happen again as the impact of the spending review hits the construction industry.”