The outsourcing group Mitie is this weekend plotting an audacious takeover bid for the biggest division of rival Interserve just hours after it endured a brief skirmish with administration.
Sky News can reveal that Mitie is drawing up plans to offer Interserve’s new owners – a consortium of banks and hedge funds – roughly £100m for its support services unit.
The support services business carries out facilities management work for the government and numerous private sector clients in the UK and the Middle East.
If completed, a deal would create a company employing close to 100,000 people in the UK, making it one of the country’s biggest private sector employers.
Around 40,000 of Interserve’s 45,000-strong UK workforce sit within its support services unit, while Mitie employs about 56,000 people in Britain.
The biggest obstacle to a deal, however, is likely to be the price Mitie is prepared to pay, which City sources said this weekend was unlikely to be much more than £100m.
Interserve’s lenders, however, are said to be focused on a price closer to six times the division’s earnings, which were £58.6m last year.
Lazard, which is advising the group of funds which took control of Interserve on Friday, is not running a formal sale process for any of its operations at this stage.
The support services division has a strong pipeline of new business, and has improved its profiitability under the recent leadership of chief executive Debbie White.
However, sources close to Mitie pointed out that it had won big contracts from Interserve in recent weeks from a national retailer and major travel industry player.
They added that a number of Interserve’s contracts with the Ministry of Defence and other Government clients were due to expire in about two years’ time, which would impair the unit’s profitability.
The gulf in value expectations suggests a deal is likely to be difficult to reach.
People close to Interserve’s new shareholders, which include Royal Bank of Scotland and the hedge fund Davidson Kempner, said they were happy to keep the group intact for the foreseeable future.
Interserve crashed into a pre-pack admininstration on Friday after shareholders rejected its board’s plans for a debt-for-equity restructuring that would have left shareholders with just 5% of the business.
The campaign against the deal was led by Coltrane Asset Management, a US-based hedge fund which was seeking a much larger chunk of Interserve’s equity.
The vote against the deal was decisive, with just over 60% of investors rejecting it and in the process wiping out thousands of small shareholders.
Sky News can also reveal that Coltrane, which is now considering legal action against Interserve’s board, demanded last weekend that the company make a £30m cash payment to shareholders in return for its support.
On the eve of the vote, it then amended its demand to a 15% stake in Interserve for existing shareholders, while the lenders were only prepared to offer 7.5%.
Mitie’s raid on the support services business unlikely to be the only interest in parts of Interserve’s operations.
This weekend, Serco and Sodexo said to be interested in acquiring parts of the support services business, while RMD Kwikform, its construction engineering arm, is also likely to attract bids.
Interserve’s brief dalliance with bankruptcy comes just 14 months after the collapse of Carillion, and has raised fresh questions about the outsourcing sector’s ability to finance itself.
It is unclear how supportive Whitehall would be of efforts to combine the facilities management arms of Mitie and Interserve, although government officials are thought to be encouraged by the latter’s recent turnaround.
Mitie has rebuilt its financial and operational credibility under chief executive Phil Bentley, who ran British Gas and then Cable & Wireless Communications before joining the outsourcer in 2016.
Although its shares are down about 9% during the last 12 months, they have outperformed most of their rivals in a challenging market in which outsourcers have been hit by protracted concerns about their finances.
If he does pursue the Interserve support services deal, Mr Bentley could finance it with a combination of Mitie’s existing debt facilities, or the proceeds from the sale of its landscaping services business.
Sources said this weekend that the business was being put up for sale, with Evercore advising on the process.
They added that the unit could itself command a price of about £100m.
While Mr Bentley could also pursue a small equity placing to support any acquisition, he would not be willing to ask Mitie’s shareholders for new equity in the form of a substantial rights issue.
On Friday, Mitie shares closed down just over 1%, giving it a market capitalisation of just over £535m.
Mitie and Interserve both declined to comment on Saturday.
Headline: Mitie plots £100m raid on giant Interserve arm
Standfirst: Mitie, the FTSE-250 outsourcer, wants to create a company employing 100,000 people in the UK, Sky News learns.