ºÃÉ«ÏÈÉúTV

"Cash-strapped Amey retreats from £3bn defence PFI" screams the headline from ºÃÉ«ÏÈÉúTV's 7 March issue. This "retreat" became a rout with the publication of its disastrous interim results on 26 March – a pre-tax loss of £129m that left shareholders clamouring for a sale of the group (see 28 March, page 11).

Just two years ago, the message was distinctly different, as the company went marching off into the support services sector without so much as a backward glance. So what went so terribly wrong – and what should Amey do to stand a chance of survival?

The reality was – and is – that support services as an industry is immature and poorly understood by the market. It can best be described as an economic activity that survives by doing more and more work for less and less money – year after year. It lives on productivity improvement, and that needs serious investment in systems and training. Jarvis, for example, spent £20m on software installations over the past three years.

Amey – and other like-minded companies – had tackled this market from a mature (some might say stagnant) construction sector position. It moved for two simple reasons:

• To get regular income streams on which to base more stable profit and cash flows
  
• To bump up its share price by moving into a market sector where more promising yields were waiting.

However, nobody told it that it would need to fumble blindfolded across a narrow and tortuous bridge to get to this holy grail. The pain of getting there has been severe for Amey in particular, draining resources that could only be replenished by bullish equity markets.

Where did Amey go wrong?
When Amey moved into support services, it took several key steps that may have seemed good at the time, but in fact caused the company serious problems.

First, it renounced construction – a low margin but cash-rich business.

Second, it took a running jump into the deep end of public–private partnerships. However, getting involved in the Croydon Tramlink deal was like diving into shark-infested waters. Planning issues, cost overruns from badly structured contracts and a poor understanding of the time needed to reach stability all led to a gaping cash wound through which blood is still flowing.

Third, Amey tackled the PFI. PFI has absolutely nothing to do with support services – it is an asset-based business and the routes to entry are tortuous, expensive and strictly for those with enormous pockets. Profits in this sector have so far been earned from refinancing rather then from service delivery. Amey's eight PFI stakes have now gone to Laing after a fire sale, but the firm will continue to carry out facilities management work for at least the first five years of the contracts.

Fourth, it bought outsourcing firm Comax in order to be seen as a high-tech support services provider. Comax, however, was grossly overvalued at nearly £150m – a lot of money for a firm that derived more than half its revenue from a single client, the DERA (Defence Evaluation and Research Agency).

Fifth, Amey failed spectacularly in implementing its "enterprise resource planning" software system – a failure shared by fellow support services firm Atkins (see "Suspect package", 28 March, pages 54-56). This mistake cost the firm vast amounts of cash at a time when it had none to spare.

Finally, Amey did actually develop a support services business of some quality in accommodation and road and rail maintenance. This has some good people on its staff and genereates cash. But even this sector is becoming more competitive, and the firm is one of several under attack from the rail authorities, which seem hell-bent on slashing contractors' margins. What's more, Network Rail's attempt to make cutbacks by not renewing an Amey rail maintenance deal on the Reading to Paddington line is effectively kicking a man when he is down for no tangible benefit.

All of these steps had to have serious funds E E behind them. But falling share prices have made it hard for support services firms to raise money from the City. Even the firm's high-profile and internally popular chief executive, Brian Staples, could not stop the rot, and he finally resigned in January this year.

Hang on for dear life to the Tube Lines PPP deal. This is absolutely essential to Amey’s survival. It is a new, long-term business

So, what now?

Eight steps to survival
To survive as an independent company, Amey has no choice but to change its whole culture, business model and perception in the market. If it does not do this itself, somebody else will.

The steps should be as follows:

Stabilise the cash position. Amey has done this through an agreement with the banks until mid-2004 for loan facilities of £221m – provided that it does not declare dividends. In any event, it does not have the reserves to do so. Whether this leaves the firm with an ability to grow is doubtful, as the money is sufficient only to patch up the existing business, not to expand into new areas or buy other companies.

Hang on for dear life to the Tube Lines PPP deal. This is absolutely essential to Amey's survival. The apparent willingness of its consortium partners to carry on if Amey leaves the Tube Lines consortium proves that the enemy was the overlong bid process, not dealing with London mayor Ken Livingstone and London transport commisioner Bob Kiley. The Tube PPP represents an entirely new and long-term business and not an asset transfer. The deal's £60m equity requirement must form part of a financial restructuring.

Walk away from PFI in general and the Croydon Tramlink in particular – whatever the pain.

Use its best asset – Sir Ian Robinson. Amey's chairman understands the business and its cost base and will build a team. Robinson is trusted by the City and his efforts to date go far beyond what shareholders usually receive from non-executive chairmen.

Convince the world that the selection of an insider, Mel Ewell, as chief executive was based on his ability – not on the inability of Amey to attract an outside party because of the black holes in its accounts. Amey sources insist that Ewell is the man for the job, so he must be brought face-to-face with the stakeholders and allowed to make brave commitments and stick with them. The only way to rebuild faith for an independent company is to make early promises based on sound principles – and keep them.

Ewell needs a partner, and a temporary finance director is a hostage to fortune. The loss of two FDs is unfortunate enough, but not to be able to replace them is downright careless. No doubt June cannot come quickly enough for secondee Eric Tracey to get home to sheltered employment at Deloitte & Touche after six months at Amey.

Cut costs. Their business is all about cutting costs – there will be no end to what they can do if they put their mind to it. They will have agreed targets with the banks – they should beat them.

Redefine Amey's business model to explain to stakeholders how the firm will rebuild value.

If it can be made to work on cash terms then sell that model again and again to every analyst and bank it can get to. The firm needs new non-executive directors to do it. If they can prove that they have a business model that works then shareholder value becomes another game altogether. Possibilities will emerge that do not now exist, and financial partners will be found – even if debt has to be swapped for equity. The way the accounts read now, 17 pension adjustments and other write-downs will leave negative shareholder funds of more than £30m. Try trading out of difficulty with that around your neck …