The breaking of Rok

At 3.48pm on Thursday last week, Building finally got through to Rok chief executive Garvis Snook after days of trying. Were we about to get an exclusive on the collapse of one of the UK’s largest contractors? The once-ebullient boss was never one to avoid media attention - always available for quotes, even if his claims about Rok weren’t always wholly convincing.

But this time, Snook was not talking. He sounded both crestfallen and like a man with a story to tell. “I’ve been advised strongly not to say anything to the media,” he said, with an edge of exasperation. “Maybe some time in the future, but I’m afraid I can’t help you.”

Quite a turnaround for a man who once posed in leathers astride a Harley-Davidson to garner publicity for his firm. But nothing compared with the turnaround experienced by the company he spent a decade forming in his own image.

In 2000, Snook arrived at sub-£100m turnover builder EBC, and began a restructure that culminated in 2001 with a complete rebranding - as Rok - and a new mission statement: to become “the nation’s local builder”. His drive and vision resulted in the company growing tenfold to a peak stock market valuation of £437m in 2007. It employed more than 4,000 people and revenue topped out at more than £1bn in 2008.

But by the time the axe fell on Monday last week, company shares valued it at just £34m, only a fraction more than when Snook took over. Insiders say that in the final months customers deserted the business, which turned over £714m last year, leaving it with a final work in progress volume of just £150m. What on earth went wrong?

Rok always had its doubters. Long-standing Cenkos analyst Kevin Cammack says: “There was a scepticism around Rok, as it never seemed to generate the cash that type of business should do.” However, for many years it was very hard to argue with the headline numbers - revenue up from £88m the year he took over, to £1.01bn in 2007, profit growing every year for seven years, until the credit crunch hit.

The first sign of anything untoward was in May when Rok issued a profit warning citing underperformance in the plumbing, heating and electrical business, Avonside, it had acquired in 2007. The firm said the problems were dealt with “swiftly and decisively”. But things really started to go wrong when, three months later, Rok announced it was suspending its group finance director, Ashley Martin, after discovering the problems were worse than it thought.

Shares fell 40%, despite Rok once again assuring investors “this is the full extent of the problem”. The unfolding tragedy turned temporarily to farce when, in September, Martin was cleared of any wrongdoing by the board, but decided to resign anyway.

Then came Connaught. Numerous sources suggest that the collapse of Rok’s rival social housing contractor had a catalytic effect on the sector, spooking customers, banks and creditors alike. It became clear that size wasn’t necessarily going to be enough to protect contractors from bad management or luck. One financial source, close to Rok and Connaught, says: “If you asked the industry for the past five or six years which companies with high share prices didn’t deserve it, the two names that came up were always Connaught and Rok. So when Connaught fell, it affected Rok particularly.”

Jan Crosby, head of construction at KPMG, says banks and clients pulled in their horns across the sector. He says: “For the banks this means they take much more interest in what they’ve already authorised, and if you need money, it’s now much more difficult. And for those in breach of loan covenants, they start taking a much closer look.”

With BSS, Travis Perkins and Jewson all rumoured to be owed millions by Connaught, suppliers tightened their supply lines.

Rok’s acquisition-fuelled growth of the past decade didn’t help, as bolting on lots of new companies each year made it hard to gauge how well the firm was really doing. The acquisitions also left Rok with £70m of bank debt, a high gearing compared with most contractors. None of which helped when the market started to lose confidence.

While the numbers have not yet been made public, it is clear that there came a point when customers started deciding they didn’t want to be involved. Sources who claim to have seen some of the books say the drop-off in turnover over the past few months was dramatic. One said: “The work-in-progress and money owed has fallen to just £40m in total. That works out to a company turning over about £150m. The clients have just deserted wholesale. All the commercial and private work has disappeared.”

Whereas Connaught’s overly-aggressive accounting techniques have been blamed for its collapse, the source says it was the dramatic loss of turnover that tipped Rok into crisis, rather than losing one customer.

Rok’s administrator, Pricewaterhouse Coopers, said turnover had dropped sharply, although it has not put a figure on the fall.

This sudden loss of turnover meant the banks - including HSBC and RBS - no longer felt relaxed about the £70m of acquisition debt on Rok’s books. It was okay for a company turning over £714m, as Rok did in 2009, but not for one turning over £150m. Something had to be done, quickly.

Rival Morgan Sindall, whose subsidiary Lovell bought Connaught’s contracts for £28m, spoke to Rok about buying it, but turned it down because it realised the debt mountain was too much.

Rok also approached its bankers for a restructure, which, according to one source, would have involved the injection of £30-40m with little certainty of a return. The source said projections suggested there would be no profit in 2011, and given the firm was worth little more than £30m at the time, the banks didn’t take long in deciding to pull the plug. The source says: “The maths didn’t work for anyone. Garvis was trying to build a house, but the foundations had gone.” At this point administrators were appointed, and last week’s sale process began.

Without access to the accounts, or the co-operation of Snook, the full story of the collapse can’t be told, but it is clear that market confidence played a big part. Some always harboured doubts about Rok’s overall strategy, and this seems to be a classic example of what can happen in a jittery market when everyone starts to lose faith.