The collapse of Connaught

Anyone who catches sight of a red Connaught van on the street is probably going to sympathise with the driver, who is likely to be facing redundancy. If they are lucky, they will be taken on by one of the firms buying Connaught’s contracts. If they aren’t, the cold consolation may be that they will not be the only ones suffering.

For example, there are the councils that were tempted by Connaught’s strangely low prices. They already lost their trousers when the Icelandic banks went under and now, just before the October spending review, they have to find money to bridge the gap between what they agreed to pay Connaught, and what the jobs really cost.

And what about the subcontractors and suppliers? They are owed a total of £25m according to KPMG, Connaught’s administrator. The cheques they’ve been waiting for won’t be arriving, and there is a danger that the domino effect of small firm insolvencies will soon ensue.

Then there are the thousands of people who live in Connaught-serviced homes: old ladies with broken boilers and unfinished access ramps, who are wondering whether they’ll be forgotten in the chaos.

And finally there are Connaught’s investors, who will receive the least sympathy. They rode the £600m-turnover FTSE 250 company’s share price like it was a rollercoaster, not realising until it was too late that it was really a train crash. Investment outfit Scottish Widows took a £13.8m hit. Sir Roy Gardner, Connaught chairman and a City veteran, lost £500,000.

The proximate cause for the mess was the decision by Connaught’s banks not to lend it £50m. This provoked criticism in some quarters: what’s £50m to the RBS, Connaught’s main lender, which was itself given bail-out money by the billion? But the banks said no, and the plc and the social housing arm went into administration on 7 September. The other two elements, the environment and compliance arms, which were in a better position, were kept afloat and are likely to be sold.

Could the banks have said yes?
On 27 April, Mark Tincknell, Connaught’s chief executive and the man behind its expansion over the past 10 years, commented on its year-end figures. He said: “This is another good set of results as Connaught continues its strong growth in all three of its divisions. Specifically, our client base is looking to us to help them cut costs in the face of budget constraints … and we are well positioned to deliver these savings. This trend is reflected in our order book, which is growing at a fast rate, and I look forward with excitement and confidence.”

The financial report also directed the reader’s attention to “notable successes” such as a five-year contract with Norwich council, which it won after undercutting rival Morrison by £5.5m.

One of the odd things about this announcement was that it was made by Tincknell. The chief executive at the start of the year had been Mark Davies, and he had abruptly announced that he was going. Tincknell, who left the chairman’s role to take over, told the press that Davies’ decision had taken him by surprise. “The first I knew about it was when he walked into my office last week to tell me.” The impression created was simply that Davies was fed up with his job.

After that, rumours began to circulate that something was not right with Connaught. The first person to go on the record was Guy Hewett, an analyst with Investec. On 17 May he published an 11-page report called “Cash flow dictates lower valuation”. This told investors that Connaught was “more aggressive in its profit recognition than its peers”. He went on to explain that Connaught was spreading the costs associated with starting a contract - mobilisation costs - across the lifetime of the work, unlike its rivals, which wrote them off immediately. If Connaught did that too, its profits would be considerably lower. Hewett’s advice was: sell.

But accounting practices weren’t the only problem. The fact was that Connaught wasn’t winning new work and it was ditching old contracts it didn’t like, which upset clients in the long term. The chatter in the City pages, and no doubt in executive boxes and boardrooms across the country, was that Connaught’s goose was cooked.

In Hewett’s report he pointed out that Connaught had lost out to Mears on work being let by Lambeth council and the Family Mosaic Housing Association, the combined value of which was £470m. He also drew attention to its “abnormally low” winning bid on the Norwich contract.

Bob Holt, chief executive of Mears, said: “The banks will have been aware of the accounting problems for a long time. But also, we saw Connaught as a declining competitor and that tells you a lot.”

The crunch came on 25 June, when Connaught announced that costs had been deferred on 31 contracts. This, it said, would knock £80m off predicted revenue and £13m off its profit. On 8 July it was announced that Tincknell was stepping down “to recover from recent health issues”; Ian Carlisle would take temporary charge. Financial director Stephen Hill would also be leaving in October.

On 26 July another update said net debt would be “significantly in excess” of £120m and that the firm would breach its banking covenants. Things were getting serious; troubleshooting appointments were made.

On 29 July Connaught secured an additional £15m short-term overdraft facility, but debt now totalled £215m. Sir Roy Gardner said he would continue fighting for refinancing, but on 7 September shares were suspended.

As always, it ended with a sad, grey statement: “Connaught has had continuing discussion with its lenders and other sources of finance with the objective of securing additional funding. The group now believe that the availability of additional funds from its lenders will not be forthcoming and the ability to provide an adequate solution to the funding issues the group faces has become increasingly uncertain.”

Uncertainty became certainty that evening when KPMG was appointed administrator.

“The banks were absolutely right,” says David Hudson, a partner at accountant Baker Tilly, who works in restructuring. “They will have carried out an independent review into whether Connaught was viable and found that it wasn’t. They don’t take a decision like this lightly. They’re not aggressive; they’re supportive. But if they thought there was a risk of not getting their money back they’d have been foolish not to draw the line.”

Chris Cheshire, chief executive of Kinetics, another of Connaught’s rivals, attended a meeting in Leeds last week at which Connaught’s contracts were put up for sale. He also understands the bank’s decision.

“I wondered why the banks didn’t want to trade through it,” he said, “but then I saw some of the numbers and it was such a train crash. It would have taken three or four years to trade out of it. And because the banks were syndicated they all would have had to agree on what action to take. You’ve got more chance of solving the Middle East crisis than that. Anyway, what Connaught was doing was a sign of desperation. A credibly run business would not be doing these things.”