Interserve dishes up a mess

Interserve banner on scaffolding
Interserve’s ingenuity went for a very long lunch

Another huge outsourcing group is in big trouble. What went wrong, who is to blame, and what happens now? Matthew Partridge reports.

In January, outsourcing giant Interserve was placed under special monitoring by ministers. While it insisted at the time that it wasn’t about to become the next Carillion, says James Moore in The Independent, Interserve is now “in rather urgent talks with its lenders about turning a substantial chunk of its £600m-plus debt pile into shares”. As a result, “punch-drunk investors” facing massive dilution have seen the shares slump by 50% in a week. They have lost 90% since January.

By describing the decision to “virtually wipe out shareholders” as a “positive step”, CEO Debbie White seems to have “inhaled too many fumes in the cleaning contractor’s cupboard,” says Christopher Williams in The Daily Telegraph. Of course, Interserve’s problems started when her predecessor Adrian Ringrose “built up its debt pile with a series of ill-advised deals”.

However, she made things much worse by focusing “on improving operational performance rather than firefighting”. Even now she acts “as if shareholders should be pleased with small margin improvements when their investments in Interserve are set to be trashed”.

One of Ringrose’s biggest blunders was “joining a government-sponsored effort to build almost useless infrastructure” says The Guardian’s Phillip Inman. These energy for waste (EFW) plants “are supposed to be efficient” but they are hyped and being built at a time when there is “a huge surplus of EFW capacity across Europe”. As a result, “the company is paying tens of millions of pounds to extricate itself from EFW contracts”.

Actually, the real villain here is chairman Glyn Barker, as “ever since the spring it’s been clear that Interserve needed a dilutive cash-raise”, says Alistair Osborne in The Times. While such a fundraising would have been “painful”, shareholders would still have been able to retain much more of the company. Instead, Barker, who joined the company when shares were above 400p, “ducked the big call and went on to mislead the market”.

Bad news for shareholders

Despite its problems, Interserve is unlikely to follow Carillion into bankruptcy, says Matthew Vincent in the Financial Times. A deal with banks in April gave it short-term liquidity, a boost Carillion never enjoyed, to explore options such as the debt-for-equity swap now about to happen. The fact that shareholders, not taxpayers, will pick up the tab will ensure that the government supports any reorganisation.

Still, avoiding Carillion’s fate will be cold comfort for shareholders as “the scale of deleveraging required is so great that… assuming the company is repaired, existing shareholders are unlikely to enjoy much of the upside”, says Bloomberg’s Chris Hughes. Indeed, “it will be the new money and the lenders… who enjoy the lion’s share of any recovery”.


Chinese court takes a bite out of Apple

US semiconductor maker Qualcomm is claiming “an important victory” in its “sprawling legal battle” with Apple, says Tim Bradshaw in the Financial Times. A Chinese court has found Apple violated two Qualcomm patents and has therefore barred Apple’s Chinese subsidiaries from importing and selling seven iPhone models, including last year’s iPhone X. The ruling comes as the two companies “have become embroiled in a series of lawsuits during the past two years”, with Apple accusing Qualcomm of abusing its position in mobile chips. Qualcomm has retaliated with several allegations, notably breach of contract and patent infringement.

Courts in Germany and America are unlikely to impose a similar ban, says Bloomberg, but “the ruling increases political risks for Apple, which is embroiled in a broader trade dispute between the US and China”. Overall, the fact China accounts for nearly a fifth of iPhone shipments will “get people serious about trying to settle things”.

Apple’s loss comes “as evidence has been building that the newest iPhones aren’t selling as well as expected”, says Dan Gallagher in The Wall Street Journal. Indeed, a recent survey found consumers are now less keen on iPhones than during the disappointing iPhone 6s cycle in 2016. The ban will “further complicate Apple’s growth prospects” in the Middle Kingdom. So “while Apple’s shares might look relatively cheap after shedding about a quarter of their value over the past month, investors should be cautious about dialling back in”.


City talk

• The restructuring plan unveiled by WPP CEO Mark Read consists of “hundreds of words of jargon and twaddle”, says Jim Armitage in the Evening Standard. And it’s hardly ambitious. Cutting 3,500 jobs will only save £275m a year, which is “trifling in a business that’s lost £6bn of its stockmarket value since September”. Similarly, the planned simplification “isn’t that different to moves already in train”. Read not only needs to be “radical” but also find a way to improve WPP’s “patchy” record on “winning and retaining clients”.

• Superdry’s shares fell by a third after another profit warning suggested earnings would fall to £55m, down from £97m in 2017-2018. Expectations “were already low” for Superdry but this latest warning suggests the business has“really lost its way”, says AJ Bell’s Russ Mould. Shareholders shouldn’t count on matters improving any time soon. The brand is centred on clothes with Japanese writing on them, which “seems like a fad which may have peaked”. With the stock down 81% in the past 12 months, shareholders “will be fuming”.

• It’s been a dismal few months for Facebook shareholders, with the stock down 37% from its record peak. So they will be cheered by news of a big boost to the sum the board has authorised for share repurchases, says Daniel Sparks for The Motley Fool. The $9bn increase to the repurchase programme “reflects management’s confidence in Facebook’s business and highlights how much cheaper shares have become recently”. Indeed, the company should have no problem affording an extra $9bn a year given that it had free cash flows of $17.5bn in the past 12 months and also has $42bn worth of cash on hand.

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