Poor Jarvis is on a train to nowhere
From super-success to dire straits, the British engineering company which just couldn't avoid its fate. Mark Leftly reports
Sunday 04 April 2010
At the Windmill Inn, just outside the medieval walls of York, rail engineers drowned their sorrows with pints of Black Sheep and John Smiths Extra Smooth. Earlier that day, many of them had been made redundant from Jarvis, the York-based rail contractor that was once worth £1bn but is today in administration with little hope of survival.
The city's National Railway Museum will host a jobs fair next week to help the 1,100 people who were booted out on Wednesday find work. At the same time, administrator Deloitte will keep what little remains of the business going – primarily facilities management contracts that are legacies of Jarvis's foray into the Government's Private Finance Initiative (PFI) – until buyers can be found.
It is a shocking end to what was once a great success story of British business, driven by its champagne-swilling former chief executive, Paris Moayedi. That was the first phase of Jarvis's roller-coaster ride. The second was the survival campaign successfully waged by Steven Norris, the colourful former Conservative transport minister, in the wake of the Potters Bar rail disaster in 2002. And the third, final, stage has been its collapse, an almost Shakespearean feeling that outside forces had taken Jarvis's fate out of its own hands.
Part 1: Rise and fall
"Moayedi was a brilliant entrepreneur, but not a good businessman," smiles a former colleague.
The Iranian's brilliance was demonstrated when he bought a small construction firm in 1994 for just £3.6m. He moved Jarvis into track renewals and maintenance work, buying advanced equipment to ensure it won big contracts, and diversifying into PFI. Moayedi had noted that the new Labour government was obsessed with building hospitals and schools with private money, meaning that lucrative contracts were available if prices were pitched carefully.
Moayedi was a tough boss. "He wasn't a real shouter, but he could be cutting if someone did something wrong," says a former Jarvis employee. At one point, a senior executive suggested a plan to impress a client, which Moayedi believed looked cheap. "That is like feeding sausage to a lion that has just gorged on fillet steak," he snarled.
As the City was wowed, and expected ever greater things from Jarvis, so Moayedi and his management team felt forced to deliver. In 2000 and 2001 the group won 19 major PFI contracts: a sign that Moayedi the businessman was less than perfect.
Jarvis's bid teams were winning work by pitching at low margins, meaning that any cost increases, typical in construction, could not be absorbed later. "The PFI team was incentivised to get deals done," says a former adviser to the group. "They had to be seen to be winning work, so there were lower margins and greater risk,"
Worse was to follow. "The defining moment for Jarvis was Potters Bar, without a doubt," sighs a source close to the company. "And yet nobody can point to anything that the maintenance guys at Jarvis did wrong."
On 10 May 2002, seven people died when a train derailed on track maintained by Jarvis. The company was widely blamed, and though it later apologised on behalf of the entire industry, it has never been proven that the company was at fault. No matter, Jarvis's reputation was dirt and convincing local authorities to award it PFI contracts became next to impossible.
Part 2: Rising from the ashes
Jarvis was haemorrhaging cash, and executives' attempts to woo potentially friendly journalists and ministers were unsuccessful.
Moayedi moved from chief executive to chairman in 2003, a role for which someone who was so hands-on was patently unsuited. The new boss, Kevin Hyde, cruelly dubbed the "Fat Controller" by some in the company, made a terrible mistake that September.
A train was derailed at King's Cross station during the morning rush hour on a piece of track Jarvis had been repairing. Hyde decided to kill the story by quickly admitting Jarvis had made a signalling error. The trouble was that the cause had nothing to do with Jarvis.
Hyde's blunder, which infuriated Moayedi, entrenched Jarvis's reputation for ignoring health and safety regulations, even though in retrospect this seems to have been unfair.
Investors complained to a non-executive director, Steven Norris, that Moayedi had to go. In October 2003, he launched something of a coup, telling fellow non-executives over coffee that he would ask Moayedi to step down.
Moayedi left in November and was succeeded as chairman by Norris. Hyde was replaced by Alan Lovell, considered a turnaround expert from his days at construction group Costain and sports equipment group Dunlop Slazenger.
The duo instigated a £350m debt-for-equity swap with its creditors, as the interest repayments were crippling the company. They slimmed down the firm, stopped construction contracts and refocused on rail work.
Although there were subsequent difficulties, such as a profit warning in November 2007, the company kept its head down and was respectable again, without reaching the heights of the turn of the millennium.
Part 3: Doomed to failure
Job done, Lovell moved on and Norris plotted a profitable escape for the company's shareholders. Adviser Close Brothers sought a buyer, and by mid-2008 US manufacturer Caterpillar and a private-equity group were battling it out to take control.
Management felt that talks had reached a sufficient level of detail to announce the possibility of a sale to the stock exchange. But the collapse of Lehman Brothers in September 2008 sent a chill through the markets and Caterpillar put a global freeze on new acquisitions.
Any chance of a decent deal was ruined. The pity was that Jarvis could have been sold at a premium as it had been given plenty of work for the previous three years. Then Network Rail dropped its bombshell, slashing the volume of work it was giving to contractors by 30 per cent. Jarvis was forced to make 800 redundancies.
"I always look to Network Rail and its inability to manage a sensible stream of work – supply just fell off a cliff," says a former Jarvis consultant, angered that such simple renewal work was dished out inconsistently.
Jarvis had relied too heavily on one customer, Network Rail. The board had no more control over its client than it did over the economic woes that had ruined its sales plans.
The only bright spot was the £55m Evergreen contract it won in January from Chiltern Railway. But creditors were growing tired of cashflow problems. Norris and his team tried desperately to convince them to support the business until Evergreen revenues start coming through next month.
"If the banks continued to back us, the plan was to sell to a big civil engineer which wanted to get into the rail industry," explains a Jarvis source.
They failed, and Deloitte was called in last month. That decision has left the business virtually worthless, the only beneficiary Punch Taverns, the owner of the Windmill Inn.
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