Connaught PLC is a constituent of the FTSE 250 Index. Its two pence ordinary shares were trading in October 2009 at over 400 pence per share but on 10 April 2010, these shares traded at a 52 week low of only 9.20 pence and last week, before the company went into administration closed at 16.65 pence. That last share price valued this leading company in its field, with about a six percent share of an annual sector £10 billion, at only £23.27 million - and that includes the parts still fully operational.
Connaught was founded in 1982 with headquarters in Exeter and operated under three major divisions. Employing some 4,200 workers, the Environmental and Compliance divisions run training, advisory, consultancy and full delivery project management services and since Connaught entered this field in 2002, these divisions have become key players in what is a rather fragmented sector of industry.
These divisions continue to prosper and are unaffected by the collapse of the longer established Social Housing division, Connaught Partnerships, based in Leeds. BBC News announced on 07 September 2010 that the company was likely to be put into administration and SkyNews reported later that night that the directors, having failed to secure extra funding from lenders, the company had suspended trading in its shares and would be put into administration (on Wednesday).
With about 4,700 workers, Connaught Partnerships employed tradesmen, many on a sub-contract basis, to carry out planned and response maintenance and repairs to local authority council housing and housing associations. Given that Shadow Chancellor Alistair Darling had indicated the need for severe cutbacks in government expenditure if Labour were returned to power and that the new Coalition Government is in favour of making these cuts bigger, sooner and over a shorter time frame, Connaught Partnerships could only expect much tougher market conditions to come.
In April 2010, the company issued a very bullish interim six month report after their share price imploded due to unease in the Stock Market about questionable, though quite legal accounting practises, had thrown doubt on the company's figures and projections. Only some six weeks later however, in June 2010, Connaught issued a profits warning stating that 31 contracts had been postponed due to Government cutbacks and so revenues would be much lower than previously anticipated. Other companies in this sector, equally at risk of Government spending cuts, very quickly assured the market that they had no problems. Everybody noticed that Connaught had crumpled before new Government austerity measures had been outlined, never mind implemented! The trouble must lie within the company itself.
Following the firm's collapse with estimated debts of over £220 million, auditing partners KPMG were appointed as administrators on 08 September 2010. Their prime task was to sell off Connaught's local authority contracts. KPMG partner, Richard Fleming, told the Scottish Sun newspaper that job losses would be "inevitable given the huge losses incurred at the Group."
Group hub sites operate in Leeds, Bromsgrove, Crawley, Exeter and, overseeing Scotland's share, Glasgow. In all, there are some 280 contracts in force or due to start with local authorities. Scotland has seen the company just complete a £23.5 million contract to upgrade kitchens and bathrooms for Perth and Kinross Council and the company signed a similar contract, worth £15 million, with Renfrewshire Council in July. Many council and housing association tenants in Dumfries and Galloway are presently unsure if work currently ongoing will be completed, and if so by whom? The Connaught workforce of 500 in Scotland is equally uncertain of its future.
There's a very big problem for KPMG as Mr Fleming explained: "...many of the contracts were loss-making as Connaught had under-cut rivals to win the business." This is at the heart of the firm's collapse many observers believe, "killer" or "suicidal" deals.
Looking at the last full year corporate statement ending 31 August 2009, one doesn't see a company about to go "belly-up", with Group revenue rising to £660 million (up £107 million on 2008) and Group profit before tax, rising by £5 million to £26.7 million and a dividend for the year increased by 18 percent. Three principal shareholders are named: BlackRock Inc with 9.7 percent of shares; Co-operative Asset Management, holding 8.9 percent and Parvis Asset Management with 7.1 percent, all as at 29 October 2009.
There are however a couple of issues. Under the heading "Creditor payment policy" the Annual Report states: "At 31 August 2009, 54 days purchases to suppliers were outstanding (2008: 49 days). A lot more generous than I thought the norm, but even if this period were a sector average, the settlement period is going in the wrong direction.
Further into the Report the point is made that day-to-day management of the Group is delegated to the Chief Executive supported by the Group Executive Board. A key task of this body is to oversee "Internal controls and risk management". This, the fourth of eight key component duties of the Board is really the most important. "Risk" and how the company deals with it, is a main feature in the Annual Report and is explained to stakeholders in some detail - all of pages 24 and 25!
Yet this is apparently at variance with page 23 which assures readers: "The Group's position with regard to amounts recoverable on contracts is routinely monitored. Customers of the Group consist substantially of public sector organisations and contracts are secured on a long term recurring basis. The Directors consider the customer base therefore to be of a nature where there is limited credit risk to the Group."
Throughout the Report, apparently contradictory statements are made concerning issues of risk to the firm, including "the risk of credit default by customers" when Social Housing/Connaught Partnerships accounted for £528 million of the Group's £660 million revenue. Issues and policies concerning risk are delegated and "cascaded" through the company's divisions and that "it is both understood and managed whilst not discouraging the entrepreneurial spirit of the staff".
Tucked away in the Report is what I think is quite critical. Under the heading "Net Debt", it states that the business remains largely self funding but it draws on debt to fund acquisitions. Net Debt increased from £71 million in 2008 to £89 million in 2009!
What was the straw that broke the camel's back? It wasn't Government austerity measures which have been long announced by both major parties and a prudent company would have seen the ominous signs in 2007 when the financial crisis started to unravel and governments in every major country started injecting hundreds of billions into their economies trying to keep the financial system afloat. Given the change in the economic climate Connaught should have realised that permitting entrepreneurial flair and delegating and "cascading" risk management and assessment in a multi-hub organisation could no longer be practised. Time to reign in and control from the centre.
Unorthodox accounting practises: like writing off set-up costs throughout the contract life where within the first accounting period is the sector norm; only made the market more sceptical, likewise the suggestion that Connaught may have brought forward income to enhance current figures.
It's that Net Debt figure of £89 million - some five years of net 2009 profit. Added to killer contracts plus a recession, it's a wonder Connaught's collapse did not come sooner.