The saying goes that crime doesn’t pay. Talk to Tim Jones, the group finance
director of FTSE-250 support services and PFI group Interserve, however, and he
will offer three very good examples of why it does.
Having been named the preferred bidder for the Addiewell Prison PFI project
in West Lothian in September, Interserve will, if the project gets the final
go-ahead, have three jails in its burgeoning portfolio.
A women-only prison in Ashford, the first purpose-built multi-sex prison in
Peterborough and, if successful, the new Addiewell venture would complete the
company’s portfolio of clinks. On top of that Interserve also part-owns and
manages a dedicated immigrant-detention centre near Heathrow, completing the
custodial interests of Interserve.
The company has become something of a central cog to the criminal justice
system over recent years. As well as winning contracts to build and run several
UK prisons, Interserve plays an integral role in the Metropolitan Police. In
fact, were you to incur the wrath of the Met to such an extent that it decided
to bash down your front door in the middle of the night, the chances are that
the person that did the bashing would be paid by Interserve.
The company’s business model is a fascinating one. On top of its portfolio of
prisons it builds and maintains hospitals. It also runs Ministry of Defence
training camps in the Falkland Islands and owns some schools.
Delving into the 2004 annual report illustrates how fascinating a business
Interserve is. No fewer than 62 subsidiaries, joint ventures or joint
arrangements have been established by the company. Each one is a separate
business involved in operations as diverse as building and maintaining 8,000
London council homes to helping build the San Roque dam just outside Manila in
So how can the company present such a complex business in a simple,
easy-to-understand way that investors, analysts and shareholders are comfortable
with? “We spend a lot of time thinking about how to simplify and how to present
it to people,” says Jones. “We have four main operating divisions, and people
have struggled with how different they are and what they do for each other.”
He says that PFI is part of the complexity problem, pointing to the 24
special purpose vehicles that Interserve has established, each of which runs a
single contract. “Each PFI contract is a different business in its own right,”
he says. “Each one has its own set of accounts and each has its own non-recourse
debt. So each one of these files a separate set of accounts with us.”
With the 2001 collapse of Enron and the dubious role that SPVs played in
keeping debt off the company’s balance sheet and away from the prying eyes of
pesky investors, Jones must be as open as possible with the structure of
“The only reason we’re doing this is because we want to do the original work
[that the SPV was established for],” says Jones. “We would never invest in an
SPV if we weren’t doing the work.” He says that the fundamental difference
between the SPVs established by Interserve and those used by Enron is that
Interserve’s are based on non-recourse debt together with a fraction of equity.
Any one venture is likely to be 95% geared – and the debt cannot be pursued
by the banks beyond the SPV. In theory, there should be no nasty surprises
should a PFI project fail, and Interserve would only stand to lose the 5% equity
they committed to it in the first place. “It would be untenable if we weren’t in
that position,” says Jones. “So it’s right that [the SPV] is off the balance
sheet because it doesn’t have recourse to us. The most we can lose is our equity
Understanding Interserve is part of the complexity problem. Its roots lie in
the traditional world of bricks and mortar construction, before it embarked on
the long road to structural and organisational change in 2001. At the time,
commentators were slightly bemused by the move.
“Tilbury Douglas is the latest firm to adopt a silly name,” quipped one
national newspaper. “It will henceforth be Interserve, which ‘will more
appropriately reflect and represent the nature of the group’s activities’. That
is, flogging cement to brickies. It’s a builders’ merchant.”
It is now clear that Interserve had visions beyond and has successfully
become far more than a mere ‘builder’s merchant’. But understanding it fully is
no easy task. Jones explains: “We’re an infrastructure and facilities management
business. We look after capital assets. We build them, we design them and then
we help you to occupy them.” How that is done – whether through a special
purpose vehicle or not – isn’t important.
The evolution from a company that flogged “cement to brickies” has not all
been plain sailing, however. In the company’s September 2002 interim results,
analysts were surprised to come across what looked like a profits warning. “The
market appears relatively subdued with some private sector clients taking a
cautious view, resulting in delay or temporary curtailment of expenditure,” said
chairman Mike Bottjer at the time.
It was seen as naïve at best to have included such a statement, which was
bound to have a major impact on the market, when perhaps the situation wasn’t as
bad as that. The company had, after all, just posted a 33% rise in profits to
The shock profits warning resulted in almost a third being slashed off the
company’s share price, after analysts reduced their full-year forecasts. Despite
Leslie Kent of Seymour Pierce cutting his then full-year forecasts from £63m to
£50.5m, however, he said the downgrade to stock was overdone. “Numerically,
there’s nothing wrong with these figures,” he said at the time.
The City was suitably unimpressed with the events, and while it may not have
been the only reason, it was certainly the catalyst to a further reorganisation
at head office. Within a year the company had a new chief executive and a new
group finance director, and the two set about improving Interserve’s battered
reputation in the City.
“I came at the same time that Adrian [Ringrose] took over as chief,” says
Jones. “It wasn’t something that I thought about a lot at the time but I think,
in retrospect, there was fantastic strength in that, because there was a sort of
changing of the guard.”
It was a good job. Jones and Ringrose needed all the battling qualities they
could muster to help cope with the immediate six months after taking over the
reins at Interserve.
“The first challenge, and I think you have to do it really quickly and really
decisively, was to ask ‘what have we got here? Are we happy with it?’” he says.
Neither he nor Ringrose, as it turned out, were happy with very much at all.
In that first six months after taking over, four loss-making businesses were
closed, an accounting policy was changed (relating to the reporting of profits
on property disposals, which was changed so they were reported under exceptional
items), and a contract with Liverpool County Council had to be exited from
because of pension issues.
“All in all, we had about a £25m exceptional charge, the closure of four
businesses, an accounting policy change and a £5.5m contract charge. All with a
new management team.”
Jones denies the drastic and decisive action that he and Ringrose took was
due to analyst and investor pressure. “What we did was absolutely an internal
decision,” he says. But the fact remains that the City was shocked and more than
a little bemused by the handling of the company’s 2002 interim results. In many
ways confidence was lost and action was needed to regain that confidence.
Indirectly, however, the investor and analyst community absolutely had a major
“What we do, we have to do for the right reasons,” says Jones. “I don’t think
investor relations will ever lead us to do something. What it did do was impose
a very tight timescale. Because this was so public, we thought that by the time
we get to our first year ends, we will have to have completed this process.”
He was right, and it worked. Within a year of the restructuring process
having being put in place the City was back on board and Interserve was once
again posting impressive results.
That trend has continued and Interserve posted pre-tax profits of £19.9m for
the first half of 2005, an increase of 23% on the same period last year.
“Prospects both in the near and longer term are positive,” said Ringrose, at the
company’s interim results briefing on 12 September.
Part of the strength of the group lies in its order book. Underpinning those
profits of £19.9m are future orders to the tune of £4.9bn. “It’s a lovely
number,” says Jones, “but that £4.9bn goes out over 30 years, so it’s not, you
know, ‘winnings’. But yes, it’s a great security, and it’s a good measure of our
He says that better measures of how successful the business has become are
earnings, cash flow and ultimately share price – the order book is better as a
more general measure of health.
From the group’s share price performance it is clear how successful
Interserve has become since Jones and Ringrose took control. Rooted to a share
price of just 169p in January 2003, he has more than doubled its value, so that
when Financial Director went to press it was valued at 345p.
The company now has a market cap of £392m, although this in itself doesn’t
tell the whole story, because last year the company saw £1.2bn worth of revenue
– an indicator of the low margins in the maintenance and facilities management
industry, according to Jones.
For now, Interserve, has more than regained the confidence of the City.
“These are a solid set of results, enough to justify the stock’s premium,” Geoff
Allum, an analyst at Investec, told the Financial Times.
It is a good job, because Jones has other things to worry about now.
International accounting standards and corporate governance have successfully
filled any gap that might have been left following the completion of the group’s
In fact, the two subjects are something of a bugbear to Jones. Although
broadly in support of a move towards what he calls “comparability of standards”,
he is sceptical over whether the standards setters are having as successful a
time of it as they could be. He says how one company presenting its figures
under IFRS could still “be radically different” from another.
He also points to the possibility of IFRS increasing the complexity of
company results to such an extent that it could take us backwards in terms of
the transparency of the accounts because underlying earnings as a measure has
become popular once more.
“Two years ago underlying earnings were something that you never really said
because it was so discredited,” says Jones. “It was like pro forma. But if you
look at the state of interims over the past year a massive number of them use
underlying earnings, because you are just trying to strip out all of these
movements that we don’t have any control over. So you’re back to pro forma
earnings, to a certain extent.”
As for corporate governance, he says there is a vast difference between
meeting the requirements conceptually and meeting them with absolute precision.
“I have no problems with what it’s trying to do,” he says. “We were buying into
all those concepts, and we still do buy into all those concepts.”
He has more problems with Sarbanes- Oxley, and the potential for a light
version hitting these shores, than the UK’s approach laid out by the Combined
Code and the Operating and Financial Review, but together they present an
enormous compliance burden. “Our issue it that we’re being asked to deal with so
much in quite a short period of time. We would want to step back and say:
‘Listen, if you add all of this together, is it really necessary?’”
Jones certainly thinks not, but his view might differ from many FDs. He is
one of the increasingly rare breeds of finance director that “likes the
technical aspects” of his role and has no ambitions to become a chief executive.
At first glance this may seem flippant and contrary to the ambition required of
a senior company director.
It is nothing of the sort, however, and Jones has designs to eventually reach
the FTSE-100. “It would be nice to get to a significantly larger company; if I
can do that with Interserve then great,” he says.
Somehow, it seems foolish to rule it out.