Outsourcers Mitie and Interserve in advanced merger talks | Business News

Michelle K. Wallace

Two of Britain’s biggest government outsourcers are locked in talks about a merger of their support services arms that would create a business employing more than 80,000 people in the UK.

Sky News can exclusively reveal that Mitie is in advanced discussions to buy Interserve’s facilities management arm for more than £250m.

A deal could be announced as soon as Thursday, when Mitie is scheduled to announce its full-year results.

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Shares in Mitie closed down just under 1% on Wednesday

City sources said Mitie was expected to launch a £200m rights issue to help fund the deal and strengthen the balance sheet of the combined group.

They cautioned, however, that a deal had yet to be formally signed and could still fall apart.

If confirmed, the combination of Mitie and Interserve’s support services businesses would create the largest such operation in Britain, with over £3.5bn of revenue.

A deal would fortify Mitie’s finances during a period of intense scrutiny of the government’s reliance on private sector contractors to deliver essential public services during the coronavirus pandemic.

Both Mitie and Interserve have been closely involved with the NHS Nightingale hospitals commissioned by ministers to assist the health service.

Mitie has been hired to run 11 COVID-19 drive-through testing centres, with Interserve also winning an assortment of government contracts to help deal with the pandemic’s impact.

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Rivals such as Serco, which has faced criticism for its handling of elements of the government’s test-and-trace system, have also been heavily involved in Whitehall’s handling of the pandemic, with contracts worth hundreds of millions of pounds handed out in recent months.

The creation of a combined Mitie and Interserve support services group – with a more resilient balance sheet than that of either company on a standalone basis – is likely to be well-received by the Cabinet Office.

The collapse of Carillion in 2018 underlined the fragility of outsourcers operating on often wafer-thin margins, and sparked criticism of the government’s reliance on such businesses.

Last week, Capita said it would sell its education software arm to raise money.

Interserve, which runs the Ministry of Defence training estate in locations such as Gibraltar and the Falkland Islands, itself went through a pre-pack administration last year, after which its then chief executive Debbie White began to stabilise the business.

Sources said that the hedge funds which gained control of Interserve last year, which include Angelo Gordon, Cerberus Capital Management and Davidson Kempner Capital Management, would own roughly 25% of the combined group.

The combination would balance Interserve’s public sector-dominated revenue base with that of Mitie, which generates most of its sales from the private sector.

For Phil Bentley, Mitie’s chief executive, a deal would consummate interest he initially expressed in April last year, and underline his aim of creating a more profitable outsourcing behemoth.

Investors in both companies are said to have been promised tens of millions of pounds in synergies from the deal, with a broader refinancing of Mitie’s debt facilities also likely to have been under discussion.

Mitie, which runs the Home Office’s detention escorting programme and security at the Bank of England, has seen its shares nearly halve over the last year, but they have still outperformed those of some competitors.

Under Mr Bentley, who ran British Gas and then Cable & Wireless Communications before joining Mitie in 2016, the company has rebuilt its financial credibility.

Nevertheless, the Interserve support services deal represents a huge bet on his part given the economic uncertainty that is likely to persist in its core market for many months.

On Wednesday, shares in Mitie closed down just under 1% at 80, giving it a market value of £295m.

If the deal is concluded, it will leave Interserve with two divisions: a construction arm and RMD Kwikform, a building materials subsidiary.

Both of those are likely to be sold over time.

Banks including Barclays, Evercore, Jefferies, JP Morgan and Santander are working with Mitie on the deal and its equity-raising, while Lazard is advising Interserve.

Both Mitie and Interserve declined to comment on Wednesday evening.

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