Via Yahoo Finance

A £271m tie-up between Mitie and Interserve could trigger a new wave of mergers as outsourcers scramble to shore up their finances, analysts have said.

The two contractors will combine their support services arms which provide businesses with everything from security staff to catering teams, creating one of Britain’s largest facilities management operations with almost 80,000 staff.

It will help Mitie gain scale in the industry while others struggle to survive the pandemic – and could spark further takeover activity as rivals rush to bulk up too. 

Andrew Jeffs, a business services partner at advisory firm Cavendish Corporate Finance, said: “As in any period of recession, reducing costs becomes imperative for businesses, and merging with competitors can offer significant economies of scale.”

Ministers have pledged to pump billions of pounds into infrastructure as part of a bid to “level up” the English regions, Mr Jeffs said, giving outsourcers hoping to cash in an extra reason to build capacity.

Mitie announced a £200m rights issue alongside the merger to help fund the deal and strengthen the financial position of the combined group.

Interserve fell into administration last year and was kept afloat by creditors which are now seeking to break up the business.

Alasdair Steele, a partner at law firm CMS, said: “Since the collapse of Carillion, the UK outsourcing sector has been under pressure with many companies – including Interserve and Mitie – undergoing re-financings.

“As has been seen in a number of other industries, re-financings are often a precursor to consolidation, and it will be interesting to see if the Mitie-Interserve deal is the catalyst for further moves in the facilities management sector.”

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Earlier this month, consultant PwC’s UK chairman Kevin Ellis said he expected to see a deals-led recovery involving far more corporate mergers and buyouts than following the 2008 global financial crisis

It comes at a time when the state is relying heavily on outsourcers for essential services during lockdown.

Both Mitie and Interserve were involved with the development of the NHS Nightingale hospitals, while Mitie was also hired to run 11 Covid-19 drive-through testing centres.

Mitie said its operations had not been hit as a hard as initially feared by the pandemic, with revenue in April and May down just 12pc.

About 600 jobs are expected to be cut across the enlarged group over three years, mainly in back office roles. 

Shares in Mitie closed almost a fifth higher at to 94.6p. 

Separately, rival Capita warned that first-half revenues would be about 10pc lower than last year due to a hit from the pandemic and contract losses.

The company also confirmed the sale of its education software services business to shore up its balance sheet. Proceeds will be used to cut net debt and boost its pension fund. Further sales will now be considered, Capita said.