Company News » The Financial Director interview – It never rains …

Eric Tracey had no previous experience as a finance director before joining troubled construction-turned-PFI company Amey as acting FD in October 2002. But, with over 30 years of senior audit experience with Deloitte & Touche, Tracey had seen his fair share of boardroom politics.

He had just finished putting Railtrack into voluntary liquidation the day he was offered the Amey job and saw it as a way of bringing his previous experience into play at the ‘doing’ rather than ‘advising’ end of business.

“It was the ideal job to move me forward, shake me up and take me out of my comfort zone,” Tracey says.

Unfortunately, the record of previous Amey FDs was not exemplary, and Amey was in crisis. Tracey’s predecessor, Michael Kayser, had left the company after only five weeks in the role. His predecessor, David Miller, resigned after accounting changes during his tenure turned a £50m profit into losses of £18m in March 2002. Miller famously ran to The Daily Telegraph, announcing that “international accounting standards are a little cup of sick” and being a public company FD “is a bit of a shitty job”. Amey was not a company most FDs would be happy to join.

Amey chairman Sir Ian Robinson had sent out an SOS to the Big Four accounting firms. And Tracey dropped everything to join the company within a week of Deloitte’s responding to the call. “I didn’t have time to do a lot of due diligence,” Tracey says. “Based on what I had read in the press, I knew it was only a matter of time before the chief executive (Brian Staples) would go.” Tracey was joining a company in trouble, but he didn’t know exactly how much.

The problem with Amey was that aggressive expansion into PFI projects had served the company well when it was the darling of the stock market in 2001. Its share price had risen to 400p in January 2002, valuing the company at £1bn. But when markets turned, the company was left stranded in the middle of lengthy, expensive bidding processes, while delays to the London Underground part-privatisation meant that insufficient cash was coming into the business. By the time of Tracey’s appointment, the share price was 25p, valuing the company at a measly £62m.

While Miller’s accounting changes helped bring Amey’s problems to the fore, Tracey says the board was still reluctant to face the facts. “The company had been through fantastic change but, as is often the case, found it difficult to accept just how close to the edge they were,” he says.

“I remember being asked at an early board meeting what our chances of survival were. When I said 50-50, they were a fairly crestfallen group.”

Tracey’s first job was to untangle the mess in Amey’s accounts. “I quickly realised the company had some serious cash-flow issues. The reporting systems didn’t cover the group as a whole – some parts were good and some were bad. I was unable to get a comprehensive picture of the group’s cash position.”

Building relationships with Amey’s banks was another priority as the company was at risk of breaking its covenants at the end of the year.

“Everyone knew exactly where we were in terms of financial covenants, but I don’t think anyone had taken it completely on board,” Tracey says.

“We couldn’t make any further draw downs. The bank’s view is that a covenant is a covenant, and once you break one they have got you.”

So, by only his second day, Tracey was presenting the group’s finances to the banks. “I started my presentation with the words, ‘These are not my figures and I take no responsibility for them. They will be subject to an Eric Tracey audit and I will get back to you.’ That was the start of rebuilding our credibility,” he says.

Once Tracey had got waivers in place from the banks and had begun designing a new cash-flow model from scratch, a bigger potential problem emerged – one that shook the board. “I realised after two weeks that we couldn’t afford to pay the interim dividend the company had already declared. The board realised this meant even more opprobrium in the press and they begged me, ‘Please, there must be some way of doing this.'” The only solution Tracey could see was the directors taking on personal liability for the money. “There was no question of ever having to threaten them.” The dividend was withdrawn. “I’m just glad it came after two weeks and not two hours, or I may not have spotted it.”

Tracey’s mission was to get the Amey board to change “from managing for growth or profit to managing for survival”. Robinson, who Tracey cites as his main ally on the Amey board along with incoming chief exec Mel Ewell, told Tracey to “do what you think is right”. But Tracey says the cultural change needed wasn’t that difficult to facilitate.

Even Brian Staples, whom the press presented as belligerent and temperamental, and responsible for Kayser’s quick exit, was co-operative. “We didn’t come to blows,” he says. “Undoubtedly, all of the directors would think ‘Shit, this is where we have got to. Where are we going?’ They became pretty committed to finding a solution,” Tracey says.

Tracey only joined on a six-month contract with the idea of getting Amey’s 2002 year-end results into some kind of shape for publication, so he didn’t have time to hang about. “There was not a lot of reliving the past,” he says. This extended to his relationships with Amey’s former FDs. “I never met David Miller at all. He was on the payroll still but was effectively on gardening leave,” he says. “I saw a lot of Michael Kayser in the first week or so, but didn’t see much of him after that. I took the view that when producing accounts for 2002, the past was irrelevant. Rightly or wrongly, we never really spoke.”

As the group’s position became clearer, Tracey set about preparing Amey for sale. Its biggest contract, to maintain part of the London Underground, had needed a £60m investment by December 2002 that the company couldn’t afford. The board came up with an idea, whereby Amey’s partners, Jarvis and Bechetel, would put up the cash and offer Amey a grace period until June 2003. Amey couldn’t raise the money on the markets and the banks wouldn’t lend any more. If a buyer for the company who would cover the costs of the outstanding contract could be found by the deadline then all would be well.

Amey needed to be lean and mean if it was to be an attractive acquisition target. Tracey and the board sold off Amey’s interests and its remaining PFI construction portfolio to Laing for £29m cash, while Amey would retain its option in the Tube and its maintenance and service contracts. He also spent a lot of time trying to tackle the company’s pensions accounting problem. Its decision to adopt the controversial accounting standard FRS17 under Miller’s tenure meant that Amey showed a huge deficit on its balance sheet as investments in an underperforming stock market could not meet employees’ pension pay-outs for the future.

“I explored to the nth degree whether there was any way we could un-adopt FRS17,” Tracey says. “FRS17 was, in a sense, a distraction. It didn’t change any of our cash flows for the next 18 months, which was what my job was all about. Yes, FRS17 is a necessary piece of information, and yes our acquirer would want to know all about it. But to have to report on it was just another piece of bad news we could have done without.”

Tracey also managed to persuade Amey’s board that asset write-downs in the range of £100m were needed to ensure the company’s survival – an action that Michael Kayser is rumoured to have suggested but failed to get the board to agree to. “I got the right amount of challenge on it, but I didn’t get undue pressure to squeeze the number at all,” says Tracey. “It was a big shock and there was a lot of disbelief when all the numbers were added up … Previously the board had considered a lot of issues separately and had not added them all up. Michael Kayser had done a lot of work in the area, as had the auditors, and they were key inputs.”

While Kayser’s reasons for leaving were “personal”, it is Tracey’s independence that he says gave him an edge in persuading the board to take more drastic measures. “Throughout the whole time I had the cloak of Deloitte and its invincibility around me,” he says.

“There were a number of conditions I laid down. I would be covered by directors’ and officers’ liability insurance, and I would not go on the Amey board. My title would be acting FD and I would have a direct reporting line into the chairman as well as the chief executive – that was very important.” The only disadvantage of being independent, according to Tracey, is the pay. “I never thought, ‘Those bastards! I could have done that if was on the board.’ But I didn’t get a bonus, that’s the disadvantage,” he says. “And my remuneration was certainly not success-based. That was probably a mistake!”

Amey’s year-end figures for 2002 appeared in March 2003, a day late after its auditors Grant Thornton requested the delay to check the figures again, which was “hugely regrettable” and yet another “Amey own goal”.

But one month later, Amey was finally sold to Spanish construction giant Ferrovial, only two months before the deadline to buy back the stake in the Tube consortium expired.

The sale price of £81m was a far cry from the hundreds of millions the market valued Amey at in 2001, but was actually little different from the value of the company pre-market surge. In effect, Amey had transformed itself from a mid-size construction business into a mid-size maintenance and services business. It’s just that it got a dotcom rating for a while and the shareholders suffered on the way down.

Tracey says that an overvalued share price inevitably leads companies such as Amey to overpay for acquisitions and make bad investments. Once the share price drops, the company is found wanting and it is left for guys like Tracey to pick up the pieces. But with the sale to Ferrovial, Tracey says shareholders were generally pleased with the deal – at least it was a way out for them.

“One shareholder said to me, ‘I’m disappointed we didn’t get a higher price, but I live by the market and die by it. You’ve done all I could ask of you, so all I can say is thank you’. People don’t often say thank you.”

For Tracey it was nice to spend another couple of months at Amey preparing the handover to his Spanish replacement. “It was nice working at a calmer level after the intensity if the previous seven months,” he says.

Looking back, he has few regrets except for failing to take a bagman with him from Deloitte to help him with the workload. But overall, he says the key to being successful in a high-pressure turnaround situation like Amey is to know how to separate work and pleasure. “I have a house in Wiltshire and got down there every single weekend. Okay, I would still spend a lot of time on the phone, but at least when I got off it I could go outside for a walk or go to the pub or something. That was one of my essential survival tricks.”

Tracey says the future may hold other opportunities like Amey, perhaps a job as “FD of a company that had an independent future and where you could make a load of dosh out of it – yes, that might be attractive.”

Until then, he is back at Deloitte’s, giving presentations about “lessons learned” and catching up on audit work. Despite the strain, he looks back at Amey with fondness. “I think (they were) pleased with what I did. The directors were happy, top-level management were grateful, and I enjoyed doing it with them.”


Name: Eric Tracey
Age: 55
Qualifications: M Com (Hons) Accountacy, FCA, FCA (New Zealand)
2002-2003: Acting FD, Amey
1998-2002: Head of Energy, Infrastructure and Utilities Practice, D&T
1990-1998: Group audit partner, Touche Ross/Deloitte & Touche
1980-1990: Audit partner, Touche Ross
1973-1980: Audit manager, Touche Ross
1970-1972: Lecturer, Aukland University, NZ

Biggest challenge in your job? Getting myself satisfied that I had bottomed-out the numbers.

Biggest hassle? Lack of sleep at night – month after month. The Deloitte emails I had to deal with at the weekend.

Which FDs have impressed you most? Different Railtrack FDs – Dave Carling, Norman Broadhurst, Steven Marshall.


Year ended 31 March: 2002/2001
Turnover: £867.5m/£786.5m
Pretax loss: (£129.5m)/(£18.3m)
Net debt: £150.7m/£106.4m
Market cap: Delisted May 2003
Auditor: Grant Thornton
Bankers: Barclays, RBS
Advisers: Hawkpoint Partners, Deutsche Bank

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