UK outsourcers put through the wringer

The sharp fall in UK stocks, battered by global uncertainties, impending Brexit and the collapse of Carillion, has impeded capital raising activities and reflects investor unease

Keith Mullin
Keith Mullin

The combination of the year-end world-wide equity slump, the ongoing political disgrace that Brexit negotiations have become which are making the overall market environment in the UK extremely tense, and a let's just say stressful period for UK construction, infrastructure, facilities management and outsourcing services companies led to an active round of sector news in the week leading up to Christmas.

First of all, we saw the banks hard-underwriting the 264 million pound 33-for-50 rights issue for construction, services and property company Kier Group – Citigroup, HSBC, Numis, Peel Hunt and Santander – being stiffed with a chunk of the shares after shareholders gave the capital increase the cold shoulder.

There was a take-up of less than 28% from existing shareholders; no great surprise as the market price had sailed well below the 409p rights issue price – to 385bp at the lows on December 19 when books closed – and investors knew they would be able to pick up stock more cheaply as underwriters were certain to offload the rest at a lower price.

Institutional sub-underwriters took up their allocation, leaving 21.12 million unsold shares to be recycled in an accelerated offering via Numis and Peel Hunt, operating on behalf of the syndicate – at 360p.

You could sense palpable relief and liberation in the LinkedIn post by Alastair Rae, Peel Hunt's head of equity syndicate, the day after the stock was sold: "Yesterday, with short sellers scenting blood and the clock ticking down fast to Christmas, the underwriters were left with the largest "Stick" (c100 million pound) in a decade. Global equity markets were in free fall again but Peel Hunt and Numis placed the entire amount within three hours into good institutional hands at a tight share price discount," he posted.

Kier's share price had gone into freefall on November 30, the day the rights issue was announced – falling by a third to 508p. The company had lost another third of its market cap by the day the rights issue was in the market (December 20) before gaining weight after the accelerated offering had been completed – to a tad below 396p by the end of London trading on December 21.

Proceeds will go towards reducing the company's net debt leverage and bolstering the balance sheet ahead of what are expected to be tighter credit conditions in 2019. Kier Group CEO Haydn Mursell said the offering was timed to ensure the cash was in the company's coffers by year-end to transform the balance sheet into a net cash position so that the company would be in a position to fulfil eligibility criteria for new projects, and service tighter supply-chain payment terms.

You've got to wonder what lies ahead for the company, given the patent shareholder unease to stump up additional capital, particularly if their rejection was predicated on the 'throwing good money after bad' thesis. Similarly, it's hard to say how fellow construction, equipment and facilities management company Interserve plc will view Kier's travails amid broader market weakness and investor queasiness around the sector.

Like Kier, Interserve has been through the wringer. Between this year's intra-day low of 6.5p on December 10 and the intra-day high this past January 16, Interserve shares had lost 94.75% of their value.

On December 21, the company provided an update on its previously announced deleveraging plan. Management has been locked in discussion with lenders for some time but the two sides have reached a conditional agreement that has targeted leverage of less than 1.5x net debt to EBITDA by the end of 2019. At the half-year stage, Interserve reported net debt of 614.3 million pound. The reduction in leverage will largely be achieved through the conversion of senior debt into equity.

The plan then is for debtholders-turned-shareholders to be materially diluted via proceeds of a public equity offering – although the company stressed that implementation of the deleveraging plan is not conditional upon a successful public offering. Probably a wise addendum. A debt payment scheduled for February 1 2019 has been deferred to April 30.

One piece of unfinished business is whether the company will spin its building materials subsidiary RMD Kwikform (the company supplying, inter alia, formwork and shoring for Hong Kong's new cruise terminal building at Kai Tak) into a separate holding company, as per lender requests.

Companies in the outsourcing, facilities management, construction and property services sector, which are heavily engaged in fulfilling UK government contracts, have been under intense scrutiny and have suffered a tough few months since the extraordinary collapse of Carillion earlier this year, with something like 1.5 billion pound of liabilities after its banks refused to extend more credit.

Capita plc, another major sector player that has similarly been under the spotlight, priced a 700 million pound 3-for-2 underwritten rights offering via Citigroup and Goldman Sachs in May this year, to fund its transformation programme.

The company's share 2018 price high of 423.4p in early January is but a distant memory. Following a profits warning at the end of January, the shares lost 47% in a single day and had fallen by 81% between that high and the low of 80.55p, a couple of weeks before the rights issue announcement on April 23. In the end, shareholders stumped up for shares representing 97.25% of the offering, which priced at just 70p, a 34% discount to the theoretical ex-rights price of 105.9p. By the close of London trading on December 21, Capita shares were trading at 107.5p.


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24 Dec 2018



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