Consultant Mouchel was this week looking to sell off significant parts of its business in a bid to cut its £87M debt and avoid going into administration.
Accounting black hole
Analysts told NCE that the move followed the admission last week that an accounting black hole had left the business around £8.6M worse off than expected. Chief executive Richard Cuthbert resigned as the news was announced and the firm’s share price crashed 45% to just 17p.
In a trading update the firm said that an actuarial error had caused it to overestimate a one-off profit on one of its long-term contracts by £4.3M. It added that new finance director Rod Harris had also downgraded expectations of profits on some work by £4.3M following a review of contract risks and project claims.
The £8.6M black hole puts massive pressure on a company that has suffered months of uncertainty following a clutch of failed takeover bids. Mouchel is already understood to be close to breaching the financial covenants on a £170M bank loan.
“I don’t see how they can get a fundraise away when there is no guarantee on earnings, there’s no chief executive and the new financial director has not come up with any new ideas”
The covenants demand that the firm keeps debt to an agreed ratio of underlying profits, so any major increase in debt or fall in profits pushes the firm closer to breaching them.
The firm was this week unable to comment beyond its trading update pending publication of its full year results, expected later this month. But its interim results for the six months to 31 January 2011 already showed the firm making a pretax loss of £1.5M and an underlying profit before tax and exceptional items of just £4.1M.
For the full year to 31 July 2010 this figure was £30.5M. Analyst Arden Partners research director Geoff Allum said the crisis has prompted his firm to revise down Mouchel’s forecast projected full year profit before tax and exceptional items by £9M to just £6M.
Mouchel’s banking covenants also demand that Mouchel makes a debt repayment of £7.5M by 31 July 2012 and a second £7.5M repayment a year later. A third, voluntary, repayment of £30M is also key.
This is required by 31 May 2012. Failure to repay this would see the interest rate payable on the loan increase significantly.
Analysts were divided over whether the firm would be able to make the £7.5M payment and stay within the limits of debt to profit ratio covenant. All said the firm would be unable to make the £30M payment.
As a result Mouchel is now understood to be seeking to raise between £10M and £15M by selling off what is left of its Middle East business and rail and energy businesses in the UK.
Buyers “sceptical of price tag”
But potential buyers are understood to be sceptical of the price tag for these businesses whose combined revenues are less than £20M.”People are not believing that the proposed sales can generate the expected returns,” said one analyst who asked not to be named.
Analysts said the firm would also have to consider selling its outsourcing and water businesses, or attempt to raise cash through a rights issue or a debt-for-equity swap with its banks.
Consultant WYG took this option earlier this year, raising £30M in cash and wiping out £51M in debt by allowing its institutional investors to buy the majority of its shares (NCE 24 June). But this option may not even be open to Mouchel, which is perceived as offering little to investors.
“The banks are going to make sure they get their pound of flesh”
Analyst Arden Partners research director Geoff Allum
“I don’t see how they can get a fundraise away when there is no guarantee on earnings, there’s no chief executive and the new financial director has not come up with any new ideas,” said the unnamed analyst.
Allum said that the firm was “dead in the water” and undeniably vulnerable to takeover until it finds a new chief executive.
Mouchel’s current finances mean it would fail basic prequalification tests to win long-term contracts offered by local authorities, he said. Such work was previously a major source of revenue for the consultant.
“If its balance sheet gets sorted out then people will start giving them work again,” said Allum.
Selling parts of the company piecemeal appears to be the only option as the firm’s two most recent suitors are understood to have lost interest (see box).
“The feeling is that people don’t know what they’re buying if they buy the whole company, so they may wait for receivers to come in,” said the analyst source.
Even if the firm avoids a breach of its covenants, its banks could choose to step up pressure on its activities.
The banks − Royal Bank of Scotland, Lloyds TSB and Barclays − this week appointed accountancy giant KPMG to advise them on Mouchel’s financial situation.
“Its future rests on the attitude of the three banks,” said analyst Canaccord Genuity director for equity research Michael Donnelly.
“The banks are going to make sure they get their pound of flesh,” agreed Allum.
In March, Cuthbert said the firm remained “vulnerable” after it rejected a £151M bid from Interserve and a bid worth around £175M from Costain then ended all talks with suitors.
The decision saw Mouchel’s share price lose half of its value — crashing from 147.5p to 94.4p in less than half a day (NCE 31 March).
Cuthbert told NCE that neither bid was in the best interests of the firm’s shareholders and that Interserve had been fixated on Mouchel’s immediate financial woes.
A year earlier, defence support services firm VT Group had offered 300p per share, before its bid was derailed by its own takeover.