Deficit at ISG originally thought to be ‘at least £200m’ but due diligence discovered it was ‘way more’, buyer claims

One of the two people who tried to buy ISG has told Building that the deficit they originally uncovered at the business was £200m – but that as sale the process went on the figure had jumped to more than £500m.

It is the first time anyone involved in the deal has put a specific number on the scale of the financial black hole ISG was facing and increases worries over the hit the supply chain will be facing when administrator EY presents its initial report into the collapse, expected to be in November.

Speculation has grown that the amount owed by the collapsed firm is far bigger than previously thought with one rival senior executive “fearing” it will be north of £800m.

And Chris Davies, chief executive at DRS Bond Management, said: “[The] supply chain, not least multiple high profile M&E contractors, will have significant losses to absorb if they are able to avoid insolvency. Casualties are inevitable.”

Along with South African entrepreneur Andre Redinger, James Overton was part of the Antipodean Holdings team that was hoping to buy the contractor after making contact with private equity frim Cathexis, run by its US billionaire owner William Harrison, in February about a deal.

Redinger and Overton, who knew each other from previous jobs, were alerted to the possibility that ISG might be up for sale. “They’d gone through the exercise of pricing and trying to sell the fit-out business [before Antipodean made an offer] so we knew there could be something on.”

He added: “I mentioned it to Andre and to be honest I didn’t think he would pursue it.

“We reached out to [Cathexis] and they set out the terms of what they were prepared to accept as a minimum offer.”

The pair made a bid “in the millions” but after months of due diligence the deal collapsed with the firm going into administration 10 days ago with the loss of 2,400 jobs.

Overton, 33, who is from Sydney and who has previously worked for Laing O’Rourke and Multiplex, said the pair were “comfortable” with the £200m number of which, he said, “at least half” was owed to subcontractors.

“[£200m] was the amount of money needed to get it back on its feet. We had £120m to put in straight away and access to another £50m.”

But as the pair’s due diligence wore on, he said the £200m figure was “way off” the deficit they eventually discovered.

Redinger has previously said the firm’s liabilities were “three or four times” the amount they first found. Overton declined to put a figure on the number but said it was “easily” £500m.

He added: “The minute we started [due diligence at the end of March] we were very much against the clock. It was very apparent the business was on a knife-edge financially.”

By the time they had completed their due diligence, which had cost close to £5m, they made a revised offer in early September. Asked if it was for £1, he said: “I can neither confirm or deny that.”

But he did say that Antipodean Holdings had not tried to offload any problem contracts onto Cathexis. “We asked for no warranties.”

Asked how ISG had racked up such a deficit, he said the firm was “chasing turnover by moving into spheres they shouldn’t have been in” such as residential jobs. He said there were also problems with data centres and overseas work.

As the sale process moved from spring into summer the “degradation” of the business got worse, he said, with productivity on sites falling markedly in July. “They were burning through the goodwill of subcontractors some of whom hadn’t been paid for months.”

Asked why the business had got itself into such a state, he blamed “poor financial conduct and mis-management”. He added that some senior management were paid “huge executive bonuses. They were running into the wall at 100mph about to crash and getting these payments.”

He said ISG stopped speaking to him and Redinger around 12 September, disputed by EY and ISG, despite claiming the pair were ready to sign a sale purchase agreement and having £150m to pump into the business straight away.

“At every stage we always acted in good faith. Andre and I are gutted. I’ve poured seven months of my life into this and I’m devastated.”

He added: “We probably weren’t going to make a profit for a number of years.” Asked why the pair were prepared to sink so much into a business that required such major investment, he said: “We felt we had a responsibility to follow through, it felt like the bloody right thing to do.”

He said the turnaround included bringing down turnover from £2.2bn to £1.8bn, adding they would have completed outstanding jobs in sectors such as residential and then not bid any more in those it was pulling out of.

Both EY and former ISG chief executive Zoe Price said Redinger didn’t have the money in place to complete the sale. EY said: “We wish to be clear to employees, suppliers, and customers that it was not possible to conclude a sale as the potential purchaser could not, despite repeated requests of them to do so, adequately demonstrate that they had the funding needed to recapitalise the business and keep it solvent.”