Thursday 15 November 2018 8:00 am

Debate: Following a share price dive, should we be worried about Interserve’s future?

Neil Wilson is chief market analyst at Markets.com.

Debate: Following a share price dive, should we be worried about Interserve’s future?

 

Yes – John Tizard is an independent strategic adviser.


Interserve’s story seems to have some parallels with Carillion.

Construction firms appear to find public service outsourcing challenging, with problems caused by clashes in culture and different expectations for margins. Contracts must be delivered to non-negotiable specified standards over long periods of time. As a result, there is little scope to increase margins or to flex service commitments if companies face financial challenges.

And that means that public sector organisations that have contracts with Interserve should be very worried.

Let’s hope that Interserve does not collapse – for, as Carillion showed, when outsourcing companies fail, the public sector must ensure continuity of service. The government needs to know the public sector’s exposure, and must have contingency plans, which was not the case with Carillion.

If Interserve fails, it could lead to additional costs and cuts in vital public services. It’s clear that outsourcing can be a risky business for both the government and outsourcers.

No – Neil Wilson is chief market analyst for Markets.com.

The spectre of Carillion’s collapse hangs over Interserve, so can there be smoke without fire? Short-sellers are upping their bets, which can signal a firm in terminal decline, but it’s too early to call in the undertakers.


There is still some headroom left on Interserve’s debt ceiling. In April, full debt refinancing was secured with committed borrowing facilities of £834m, through to 2021. Net debt has more than doubled in a year, but there is still room for manoeuvre.

Certainly, Interserve has made mistakes. But it has exited the costly energy-from-waste contract that was the source of so many of its ills. Disposals and job cuts will also help.

Crucially, the government is standing by and will not want another Carillion. Central government would step up if necessary, particularly as Interserve has been winning public contracts all year, and ministers would be for the chop if they let the company go the same way as Carillion.

A cash-call seems inevitable, but the company should struggle on.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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