Sunday, 17 March 2019

Outsourcing hell - continued

If anyone were in anyone doubt that the outsourcing sector is in big trouble, Friday saw Interserve's precarious position finally resolved. The major shareholder - US hedge fund Coltrane Asset Management - voted against the proposed debt-for-equity swap, which in turn will lead to the company going into administration. Already a couple of other outsourcers are sniffing around to see of it's worth trying to pick off some of the better bits of the business.

Ultimately Coltrane and the board of Interserve played a game of chicken and in the end neither side blinked. As usual in these circumstances it is tempting to see the US hedge fund as the bogeyman. So it's important to remember that the leadership of Interserve (like Carillion before it) got the company into this mess, the hedge funds didn't create it. Nonetheless, when faced by pleas from management not to vote against the de-leveraging plan, with the knowledge that this would trigger administration and create huge uncertainty for the workforce, Coltrane's stance is not going to win many fans. 

The role of hedge funds in this one was interesting as Coltrane and Davidson Kempner were on opposite sides (the latter on the debt side) rather than, as you might expect, shorting. It's also notable that Coltrane had previously shorted Carillion and is currently shorting Mitie Group (interesting, given the latter's interest in bits of Interserve).

I guess they must think they can sort the wheat from the chaff in the outsourcing sector, but their experience with Interserve must have been pretty painful.

So first Carillion, now Interserve and Kier Group wobbles along after a rights issue flop and a new upward revision in its debt. To state the obvious, there's a sectoral problem and it looks like consolidation is likely. That in turn might start to sharpen the questions about what we've actually achieved with all this outsourcing. If we end up with an oligopoly of outsourcers it will become a bigger political problem. But we aren't there yet.

I haven't seen much coverage of what's going from the corp gov / ESG world (would be interested if anyone has seen some). There is a sectoral problem, with jobs and service provision potentially at risk. Maybe it will get more attention from here on, it surely deserves to.

Also, what does stewardship mean in this context? As far as I can see Coltrane doesn't make or need to make any kind of Stewardship Code statement. On the other side of the Interserve story, Davidson Kempner uses a version of the same generic blah as dozens of other hedge funds that neither the FCA nor FRC seem to have shown any interest in challenging. These are firms that can have a huge influence on major employers, but don't need to say anything about what they do and why. I does kind of make you wonder what the point is. The Stewardship Code sometimes seems to be more about reporting / promotion than what's under the bonnet.

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