mouchel – a tale of executive incompetence and greed that shareholders in lots of small cap ‘zombie’ companies should pay heed of

The story of public services contractor Mouchel is another stain on the record of quoted UK equity. How the management of this company (and similar ilk) can even look at themselves in the mirror let alone sleep at night is beyond me…Like Connaught, Mouchel is one of these companies that appeared to grow exponentially during the Labour boom years of high public spending as they acquired more and more contracts of outsourced services from local government. Mouchel’s specialisation was payroll services and highways maintenance. Of course, the growth was predominantly debt financed and, as is abundantly evident now, although adding to the top line, produced very little to the bottom line (aside from the typical enhanced management remuneration that generally accompanies these situations….)

Of course, because it was the boom years, the lending Banks – a roll call of all the main UK clearing banks of Barclays, Lloyds and RBS, thought it would be clever to leverage the business 5 times over with debt versus . Net result for the poor equity shareholders – a 1p dividend and the banks to take 80% of the company with management 20%. That’s right – management to take 20% stake in an effective pre-pack (without the administration costs) in which equity holders are thrown down a cliff. How can they do this? Quite simply because the banks control the company due to the covenant breaches. 

Of course, the bank’s PR and the company’s PR are all about the 8,000 saved jobs and a continuing business. How management, which has turned a solid dividend paying 200p shareprice just 18 months ago into this calamity should be awarded 20% of the newco is incredible (they are all newish people no doubt, claiming clean hands as they do this deal to their benefit). Shareholders are being well and truly robbed and there is nothing really that they can do. Shareholders are the owners of businesses aren’t they? This fact seems to be forgotten more and more in recent years as the excesses of the Great Financial Crisis continue to unwind..

Interestingly, Mouchel even this year will manage £450 million in revenue and a small loss, probably under £10 million, and last year it managed an £11 million profit? So why is this business failing at all then? In the main it is the debt charges. £7 million in interest payments and £3.5 million for the costs of refinance for this year and there is your loss. Also, of course the £100 million of debt lent to Mouchel was at a very low price, now the Banks want to up the interest rates to current market rates as there is notice of default and hey presto, the company can’t cope with a potential doubling of finance costs. In effect the banking syndicate in cahoots with management have shareholders over a barrel

So the banks take it over with £60 million of debt at the new rates. This is a worrying new ‘legal’ mechanism to deprive shareholders of their holdings without putting the company into an official admininstration. This is a story that should never have been written, the company should not have leveraged itself to the hilt, the banks not been so keen to lend at crazy rates. But hey, that’s hindsight eh?

Mouchel is not the first and won’t be the last company to have this exact tale told during the recession. Helphire looks very much like the next company where blatant disregard by managament for their shareholders leaves one to suspect with good basis that they wouldn’t give 2 figs about throwing their long suffering shareholders under a bus. 

Lesson – be very, very careful buying ‘zombie’ companies with high debt legacys where management have a negligible holding and still continue to milk the company for excessive holdings – another classic example? One Mr Simon Fox of HMV who unfortunately for his shareholders, did not live upto his name.

Spreadbet Magazine decries management of the likes of Plus, Helphire, HMV, Yell et al who display the very worst elements of corporate ‘manglement’. There should be more concerted and vocal action against these guys by both the small and institutional shareholders and perhaps new Companies Act legislation to stamp out these disgusting situations.

The chart says it all…

One final thought – manglement of Mouchel turned down a 294p and a 151p a share – that’s right almost 300 times the current shareholder distribution – just over 18 months ago. Words fail me (and it’s not that often they do as regular readers here will pay testimony to!).

Editor