The board of Interserve, the large but ailing government contractor, knew it would struggle to persuade shareholders to vote for their own demise, which is an almost-accurate description of the proposed £480m debt-for-equity rescue in which the banks would take control and current investors would be diluted to just 2.5% ownership.
Sure enough, the rebellion is on. The New York-based hedge fund Coltrane was first out of the traps last week, declaring it wants to vote out Interserve’s entire board except the chief executive. It aims to install two new directors who, presumably, would be told to take a more robust approach to protecting shareholders’ interests.
Coltrane controls 27% of the equity and can rely on support from Farringdon Capital Management, a Dutch hedge fund with a 6% holding. So a third of the voting power plans to be awkward. Since turnout at shareholder meetings is never 100%, the rebels may be only a couple of co-travellers short of a blocking stake. Interserve’s board needs a plan B, just in case.
In last week’s dispatch, the directors danced around the issue. A “fully consensual” financial restructuring would be preferable but Interserve was “also actively preparing alternative plans to ensure the proposed transaction can be implemented in the event that shareholder approval is not forthcoming”.
What are those alternative arrangements? Was Interserve’s board threatening a pre-pack administration to force through its proposals, this time with shareholders getting nothing? That was the natural reading of the statement – and Interserve has said nothing subsequently to dispute the idea.
If a pre-pack is the alternative idea, though, the threat needs to be credible. In the Coltrane camp, they seem to believe Interserve is not a financial basket case and can service interest payments on £800m of gross debts, at least for a while. That analysis may be wildly hopeful (from outside, it looks so) but Interserve needs to say what, precisely, would happen if shareholders refuse plan A.
The formal proposal, as opposed to last week’s outline, is expected within a fortnight, so there is time to offer clarity. But it is critical that Interserve does so. Pre-pack arrangements can be messy and complicate issues such as continuity of contracts. How would such obstacles be overcome?
The stakes are high. Interserve employs 74,000 people, including 45,000 in the UK, and the board has obligations to them. Those obligations include a robust plan that can survive agitation from angry hedge funds which wish they’d punted on Interserve’s debt rather than its equity. One trusts the Interserve chairman, Glyn Barker, isn’t simply praying everyone will politely fall into line at the 11th hour. But he needs to show, in detail, that he’s ahead of events.
Room in Germany for the Premier Inn?
Fuelled with the confidence that comes with launching a single Premier Inn hotel in Germany, Whitbread now wants to open another 600. The chief executive, Alison Brittain, is aiming for 60,000 rooms in Germany “over the longer term”, which would mean the new venture becomes almost as large as the current UK chain, which boasts roughly 800 hotels and 74,000 rooms.
It’s ambitious. Managements usually only dare to pitch three- or five-year plans, but Whitbread is sketching about two decades of expansion. It is running the risk that the real world intervenes. Is the German hotel market really a bigger and more fragmented version of the UK’s circa 2004, which was when Whitbread started rolling out Premier Inns? Hard to say. The reported popularity of the first hotel in Frankfurt offers only limited evidence.
Yet the punt must be worth pursuing. If Premier Inn’s beautiful economics in the UK – return on capital employed was 13.4% last year – can be replicated in Germany, there is a compelling investment tale.
Brittain, one suspects, felt obliged to whet appetites for some bold long-termism in case there is a bidder on the prowl. Whitbread, having sold Costa Coffee to Coca-Cola last year for the frothy price of £3.9bn, is a simpler business these days and will have appeared on the takeover radars of bigger hoteliers.
The best defence against a bid is a high share price, which requires enthusiasm in the ranks. Investors are being thrown another £2bn from the Costa proceeds via a tender offer, which should keep them sweet for a while. But one hopes they give the German plan a fair crack under an independent banner.
Whitbread was a tired brewing-to-Pizza Hut conglomerate a couple of decades ago, and Premier Inn has led a remarkable corporate reinvention. It would be a shame if International Hotels Group, or some other bland mega-group, were to intervene now.
