COVER STORY: Richard Cuthbert
Buyout, flotation, merger It's been a heady few years for Birmingham support services firm Parkman, which tied the knot with rival mouchel 12 months ago. with the government's continued efficiency drive in the public sector, things are set to get headier still. In an exclusive interview Jim Pendrill caught up with chief executive Richard Cuthbert read on....
POTHOLES, LEAKS AND CRASH BARRIERS
Buyout, flotation, mergerx85 It's been a heady few years for Birmingham support services firm Parkman, which tied the knot with rival mouchel 12 months ago. with the government's continued efficiency drive in the public sector, things are set to get headier still. In an exclusive interview Jim Pendrill caught up with chief executive Richard Cuthbert
Outside it's a hot, humid, muggy summer's day in London - according to the Evening Standard it's the worst day for smog in the capital so far this year. The cars are backed up bumper to bumper, horns are tooting, a workman's drill cracks open a pavement.
These are the sounds that pay Richard Cuthbert's wages. It there's a pothole to fill, a crash barrier to repair, a water leak to be patched up, the chances are that Cuthbert's firm will have something to do with it.
For today Mouchel Parkman, formed from the merger of the Mouchel and Parkman support services businesses exactly 12 months ago, is a big hitter when it comes to sorting out the country's crumbling infrastructure - and building new infrastructure to replace it too.
Mouchel Parkman doesn't fill in the potholes, mend the leaks or build the schools itself, of course. It has an army of joint venture partners to do all that. But what it does bring to the party is ever-increasing knowledge and experience of how to manage the country's infrastructure in an efficient and forward thinking fashion. In other words, it's UK outsourcing 21st century style.
"I would hate you to write that all we do is boring work. What we actually do is far from boring," insists Cuthbert, whom I'm meeting in the second floor of the company's City office on Euston Road in thankfully cooler conditions than outside.
Dressed in an open-necked check shirt the 51-year-old looks relaxed. His laptop is right behind him but he remains firmly logged off for the duration of our chat. His mobile makes one flicker but that is soon switched off and the coffee is poured. Whatever business there is to attend to, and there is sure to be plenty, can wait - always a sign of someone in control, I think.
And so Cuthbert proceeds to tell me over the next 90 minutes precisely why his company isn't boring. Yes, it might not operate in the most sexy of sectors, but to investors at any rate that is certainly part of its charm.
And charming the City he has certainly done in recent years as head of Parkman, and now Mouchel Parkman. For unlike many businesses that have tried and failed to jump successfully aboard the outsourcing, public-private partnership wagon in recent years, Mouchel Parkman stands out as a company that has got it right when it comes to dealing with government.
Today it boasts a 4,300-strong workforce, 90 offices across the country, a £3300m turnover and a business model that is the envy of many competitors.
All the more remarkable then that one half of the story began its revival in Birmingham in the late 1990s. At the time Parkman was a Sutton Coldfield engineering consultancy that had been in existence for more than 100 years but was struggling like its competitors in a tough market. But then in 1998 former KPMG senior partner Richard Archer got hold of the business, shook it up and turned its focus towards the booming outsourcing market.
The masterplan worked a treat. Following the initial £310m management buyout backed by Gresham and Royal Bank of Scotland in 2000, barely 12 months later the company went to the markets in a £350m-plus flotation.
The business grew rapidly thanks to an increasing focus on securing long-term public sector contracts in the fields of transport, property and social housing. But even at the time of flotation Parkman was still regarded as a small player in the industry. Cuthbert, who until then had spent virtually his entire career with sector giant Atkins, admits that he initially laughed off the prospect of joining Parkman.
"When Richard [Archer] first approached me about taking over from him I thought 'you've got to be joking'. I didn't see what could take me away from Atkins. Before Richard got hold of Parkman it had had a difficult history and was a bit of a basketcase, as were a lot of consulting engineers at the time. It was run like a gentlemen's club and found life difficult when full competition came in.
"But fair play to Richard. He brought everything you could bring without specific engineering knowledge to that business. Better communications, better financing, better HR. It was a tribute to him that he got the firm through an MBO and then a float."
What changed Cuthbert's mind was three-fold. Firstly, as he got to know Archer the more he liked what he saw. Secondly Parkman had now listed. "I would never have joined if it wasn't listed," says Cuthbert. "It is a lot more interesting and more intense. I enjoy dealing with shareholders. You have to strike a balance between optimism and reality."
Finally, and clearly most significantly, Cuthbert had recently missed out on the top job at Atkins. "I had my eyes on a top job," admits Cuthbert.
So in April 2002 Cuthbert took the plunge.
Even at this early stage he had his eyes on bigger things. "We were turning over £350m and the market was saying that we and our rivals were all too small, all pretty boring. What was going to happen? We started casting around to see if we could do any deals."
Cuthbert says Parkman's strategy didn't fit with any other listed companies at the time. But he already had his eyes on Mouchel, which was still in private hands.
"At the time Parkman had started to get rid of its ex-pat stuff all over the globe and had started to properly focus on the UK and the public sector. We wanted to do that because the cashflow was better, the risks were lower and the growth potential was better. The visibility of earnings through long-term contracts was also better, both for shareholders and for potential clients in the public sector. They knew we were here to stay and we meant business."
Two years later Cuthbert has been true to his word. "Some of our contracts now stretch out for 15 years. Traditional consulting engineers probably have three to six months' work at any one time."
Cuthbert says Mouchel was thinking exactly the same. "It was quite uncanny really. Independently Mouchel were coming to the same conclusions as us. It was a bit of no-brainer for us to get together."
However, Cuthbert's initial overtures in 2002 fell on deaf ears. "At the time they [Mouchel] wanted to get to market and do a listing, which was fair enough, so we let them get on with that. A year later we rolled up again and this time we started talking more seriously. It was obvious from the start that there was a good chance it could work this time."
Cuthbert insists that it was not a merger for the sake of a merger or because of some whim. "It made sense. All the clients we both wanted to place more work with were looking for longer periods of work with fewer suppliers. There was a consolidation of the supply chain. If Mouchel and Parkman could be a bigger player together we could start to measure ourselves against the likes of Atkins and other big players.
"Mouchel and ourselves both had very similar cultures. We were both 100 years old, both originally privately owned, both just floated. If we didn't think the cultures would have worked together we wouldn't have gone for it."
But go for it they did, and with the help too of several Midlands corporate financiers including NM Rothschild, the deal was hatched in near record time. "We announced the deal to shareholders on 21 August and by mid-September we had the acceptances we needed. It was a deal that was almost made in heaven."
In the event it was Mouchel that bought Parkman for £378.3m in an all-paper offer. Mouchel paid 1.23 new Mouchel shares for every Parkman share, valuing a Parkman share at 222.7p. The deal left Mouchel with 58.9 per cent of the merged company.
So one year on, has it all gone to plan?
The latest figures suggest things are moving in the right direction. Although the group announced last month in a pre-close trading statement that it had made a pre-tax loss of £3200,000 this was largely attributed to the cost of the merger - actual profits were up 37 per cent to £36.1m. It has won new contracts worth £3150m since the merger, increasing the order book to a record £3850m.
The company said it planned to put in bids for the management of three of the eight regional distribution networks of the Transco National Grid, each of which is worth £31bn. It also said it hoped to work on the next phase of signalling work on the London Underground. Last year it won an eight-year contract worth £350m with French telecoms firm Alcatel for the Jubilee and Northern lines.
The deal with Alcatel is typical of what Mouchel Parkman is now about. Cuthbert explains: "Alcatel provide the clever box of tricks. What we do is ensure that the management of installing that clever box of tricks is carried out in an effective and efficient fashion. With the underground you only have two hours a night when you can work. You have to manage that effectively."
Mouchel Parkman's biggest client is the Highways Agency (HA) where Cuthbert says the relationship is particularly advanced. "What the agency has done is to gradually reduce the number of project managers on particular schemes and instead set up managed agency contracts (MACs), which effectively means we are the main channel through which the contract is delivered, which suits many contractors.
"I describe ourselves as the eyes and ears of the agency. For instance we have people on the motorway network 24/7 ensuring everything is running OK."
Cuthbert is a great advocate of MACs, which he believes will also help the industry in general in avoiding the high-profile problems that have afflicted players such as Jarvis, which is currently struggling under a massive debt mountain.
Cuthbert says: "Jarvis tried to move from a contractor to service provider which is actually quite a difficult thing to do. There are some contractors who have no aspiration to do that and they see working with us as an easier option, typically through MAC-style contracts. For instance with the HA we have a very good partnership with Amey who deal with the specific problems on the ground, the holes in the road, etc, while we manage the particular road system by constantly assessing where problems might be. The secret to being successful is for everyone to stick to what they do best."
And for the foreseeable future roads look set to continue being a big earner for Mouchel Parkman. As well as managing the motorway network around Birmingham and the M25 through the Amey-Mouchel joint venture, Mouchel Parkman is bidding to win a £31bn MAC-style project to improve Birmingham's road network
All in all it means, says Cuthbert, that the company is vying with Atkins for the number one position when it comes to road management in the UK. In its other three key divisions - rail, water and property - Cuthbert says the firm is now firmly on the map.
"We have narrowed down what we specialise in, but we know there is significant headroom to grow in each area."
But Cuthbert is also keeping one eye on the future and has taken the company into what he describes as four new "incubator" areas - waste, gas, education and social housing.
"The thing is that in each of these areas there are major drivers for growth which we would be foolish to ignore. In the waste market you have the movement from landfill to recycling; in the gas market National Grid is selling off its pipeline assets to the private sector; regarding education the government is pushing through massive spending on the secondary school sector; regarding social housing there is the upgrade of existing stock. There are real opportunities here. One of these incubators could fledge into a major division for us."
Education could certainly be one to watch. Cuthbert says the government's £32bn spending programme on secondary schools and its drive to build new city academies present a multitude of opportunities for support services firms.
And it could only cement links further between companies such as Mouchel Parkman and local authorities. "As time goes by some authorities will want to start working with just one outsourcing provider in a range of areas such as housing, eduation and waste. It will be more efficient for them and for the likes of us."
But Cuthbert stresses that he won't take a potshot at everthing. "Defence and health are the two biggest government departments and we are not in either. Defence is still very price-sensitive so not particularly profitable, while in health we have no track record."
Cuthbert isn't ruling out a more meaningful return to overseas markets, as long as the deal is right. The company recently withdrew from South Africa and Singapore to reduce its exposure abroad.
"Perhaps in two to three years time we might need to go back overseas. But we will not be going to the developing world, we will go to the developed world. We will only go where TUPE regulations exist too."
Oh yes, TUPE (Transfer of Undertakings Protection of Employment) regulations - without them Mouchel Parkman couldn't really exist in its present form. The regulations (see side panel) were introduced by the government to provide protection for any group of employees when a large contract shifts from their employer to another company. Invoking TUPE ensures the group of workers' ongoing employment on that business, also providing them with rights to the same terms and conditions.
More than half of Cuthbert's workforce began life working for local authorities or in the public sector.
Such transfers aren't without their problems of course. Cuthbert admits that in a typical transfer about a sixth of staff "never really come to terms" with working in the private sector. "These people have invariably worked in the public sector their whole working life and just don't see why they should be working in the private sector. They object per se to the idea of making profit out of public services." Cuthbert wryly adds: "It obviously leads to certain staffing issues which we have to deal with. It's not without difficulties this business model."
Another difficulty is pensions. "Insulating ourselves from pension difficulties is clearly an issue for us. What we are trying to do at present when we take on government departments is to take the risk going forward but ensure that historically the risks are kept with the previous employer. This is is a major issue for government pension schemes at the moment, particularly regarding the continued commitment to final salary schemes." Cuthbert couldn't have been more prescient. Days after we met it was revealed that the UK's public sector pension schemes have unfunded liabilities of about £3580bn, more than 50 per cent higher that previously thought.
On a wider front the government hasn't been without its difficulties either in pushing through reform of public services, although Cuthbert stresses that this tends to affect the gradual privatisation of blue-collar industries which Mouchel Parkman doesn't get so involved with. Cuthbert visualises the whole public-private debate in terms of a pendulum. "It started off all public sector, swang probably too far towards the private side and is now settling in the middle with buzzwords such as partnerships and joint ventures all the rage."
All the rage and reason to believe that Mouchel Parkman can only reap more. "We are well placed. The barriers to entry are high in our market and it is a rigorous procurement process. You have to be big and have a track record to operate successfully within it and we tick all the boxes."
Just as well, because Cuthbert has set himself some tough targets. In particular he wants to double turnover to more than £3500m a year by 2007 by which time the company aims to be in the FTSE350, while increasing profit margins to 8 per cent.
But Cuthbert certainly won't be borrowing his way to bigger things. "I could certainly borrow if I wanted to and have a big gearing on the balance sheet. But as the Jarvis experience shows, local authorities do not like nasty surprises, they don't like to see you heavily indebted. We've got more than £310m in the bank and we make a virtue of being cash positive."
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