No Pain, No Gain: Why Interserve should make an honour payment

Should Interserve, the beleaguered support services group, offer compensation to former shareholders of its smaller rival MacLellan? I believe it should but I suspect there is little chance of any extra cash (or shares) being put on the table. Last week Interserve's shares fell after it revealed that the investigation into accounting errors had forced the postponement of interim results, which had been scheduled for Monday. They will now appear towards the end of the month.

The difficulties at the cleaning, catering and building maintenance group have resulted in MacLellan shareholders being short-changed. In a £116m cash and shares deal Interserve acquired MacLellan in July. The terms, agreed in early May, gave accepting shareholders 80p cash with the rest of the signalled 116p bid price made up of Interserve shares, then valued at 382p.

To pile on the agony a mix and match facility went sadly wrong. Shareholders representing around 75 per cent of the capital opted to switch their share entitlement into cash. But there was insufficient money in the kitty to satisfy what was clearly an unexpectedly high level of demand. So shareholders seeking an all-cash deal had to be content with 80.67p a share and the rest in Interserve shares. Consequently, a holder of 1,000 MacLellan shares looking for a cash settlement collected £806.23p and 92 shares.

I suppose such an outcome would have just been tolerable if Interserve had held its value. But the accountancy irregularities which, to add insult to injury came to light as MacLellan was being integrated, have devastated the shares. They were already a few pence below the 382p level when the cash and shares settlement slipped through accepting shareholders' letterboxes.

Just 10 days later the accountancy problems were disclosed and the price went into freefall. The shares went to 265.5p before recovering a little. Then came the results' postponement and they slumped to 260p. This price means that for every 1,000 shares, former MacLellan shareholders are £115 out of pocket through no fault of their own. Interserve, which produced an encouraging trading statement in July, maintains it alerted the stock market about its problems as soon as it could. But it is, if unwittingly, responsible for the losses suffered. It should, therefore, accept the blame and pay up.

The shortfall has aroused disquiet. Some institutional shareholders are threatening legal action. Bob Morton, the former chairman of MacLellan whose family was a substantial shareholder, is wondering what he can do. He has taken on lawyers Mishcon de Raya and says: "We need an investigation to discover the facts. If we had known about this problem we might not have done the deal or we might have revised the terms".

Patrick Evershed, a fund manager at New Star investment group, says he would not have accepted the offer if he had been aware of Interserve's difficulties.

The oddity is that so few shareholders wanted shares. Many investors favour share exchange deals to put off capital gains tax demands. So they seek to swap the cash element for shares. But the mix and match illustrates that most MacLellan investors, including the No Pain, No Gain portfolio, were either uncannily prescient or simply unimpressed by Interserve's prospects.

If the support services group should admit that MacLellan shareholders have been short-changed it could offer shares as compensation. Not an ideal settlement but at least honour would be satisfied.

Two of the portfolio's heavyweight constituents have been active. Stagecoach, the transport group, says it has made a "promising" start to its year. The future direction of the shares remains with its South West Trains operation. The group says, it made a "strong" bid to retain its SWT franchise. If its offer is not successful the shares could be shunted into reverse.

Less resilience at Rentokil Initial. The reshaping undertaken by the chief executive Doug Flynn have still to produce evidence he has got the long awaited recovery under way.

Interim profits fell from £109.8m to £102.1m. More worryingly the group, which is known in the stock market as the royal rat catcher, cautioned about its second half trading because its important washroom and textile divisions were underperforming.