After the collapse of contractors Connaught and Rok there’s talk that Morrison could be next. Boss Guy Wakeley tells Carl Brown his company ‘cannot go bust’.
Oscar Wilde said that to lose one parent may be regarded as ‘misfortune’ but to lose two looks like carelessness.
The observation could easily be applied to the housing contracting sector following a turbulent 2010 which saw, in Connaught and Rok, not one but two industry giants collapse within weeks of each other. The result was chaos for hundreds of social landlords and shaken confidence in large contractors.
The comparison is not lost on Guy Wakeley, chief executive of Morrison, one of Connaught’s erstwhile rivals. ‘There is an interesting reputational thing. The market said that Connaught’s failure was entirely to do with Connaught - it was a mismanaged company which overstated its performance and deserved to fail, that is the consensus,’ he says.
‘It is more difficult to use that argument a second time. The industry has a responsibility to its tenants and partners to say that actually many companies in the sector are different.’
Speaking to Inside Housing in his central London office overlooking a 13-acre building site, 40-year-old Mr Wakeley appears to be positioning himself at the forefront of a drive to restore the reputation of social housing contractors.
Bucking the trend
The young, energetic boss - an aerobatic pilot in his spare time - is at pains to stress that Morrison is a different beast to the stricken contractors, run on cash not debt and, as an unlisted public limited company, not at the mercy of the stock market. And well he might be - the £267 million turnover company he joined two years ago is arousing suspicion by winning a large number of contracts. Since September Morrison has signed 10 deals which will bring in £480 million in the coming years. Rival companies have suggested it is securing work by charging unsustainably low prices (more of which later) and might be next to go under.
Mr Wakeley is quick to rebuff the rumours. ‘One of the things that makes Morrison unique is that we have no borrowings, we are entirely cash-funded and we can be like that because we don’t go out and buy companies. We just do repairs and maintenance, we cannot go bust.’
Perhaps mindful of those landlords, such as housing associations Yorkshire Housing and Town & Country Housing, which thought they had found a safe haven in Rok following Connaught’s collapse only to discover their mistake a month on, he extends his pitch: ‘The market place has been made up of construction companies who do a bit of repairs and maintenance on the side. We took the decision three years ago we did not want to be a building company. We want to be the AA for housing: our average job is [worth] £60 or £70 and we do millions of them.’
Mr Wakeley makes much of the fact that Morrison, which has an order book worth £1.5 billion, is not listed (though parent company Anglian Water Group is). This status, according to the boss, means he is not aggressively driven by analysts to report increased profit in the same way as Connaught and Rok were.
‘Connaught came unstuck by driving growth through acquisition, by buying companies and not being able to get cash out of those companies when the recession struck,’ he says.
The reasons for Connaught’s demise have been much discussed. One aspect, the so-called suicide bidding (tendering abnormally low bids to win work, the accusation now levelled at Morrison), was experienced first hand by Mr Wakeley.
In 2009 Morrison retendered for a £29 million repairs contract it held with Norwich Council. After finding savings, it rebid for the work at
£23 million. To the firm’s astonishment, Connaught came in with £17.5 million to win the contract. ‘The issue was that I knew that the cost of paying my workforce of 627 people at Norwich alone was more than £17 million,’ says Mr Wakeley. ‘I knew that bid could not be right.’
Morrison secured a High Court injunction to prevent the authority awarding to Connaught, arguing the bid was unusually low and the council had not investigated it properly. It later dropped the action after Norwich agreed to pay ‘expenses’ and protect the jobs of the Morrison workers who would have transferred to Connaught under the deal. ‘We were concerned there might be job losses and that is something we did not want to be associated with. But our business is fixing houses, not injuncting against councils,’ Mr Wakeley says of the episode.
The Norwich debacle arguably left Morrison better placed than most to observe potential problems in the Connaught business model. And after the collapse it began to sound out Connaught’s clients about work, eventually picking up temporary work when the firm collapsed in September, including jobs worth £4 million (on top of £14 million in existing contracts) from Lambeth Council.
Initially, Morrison expressed an interest in picking up permanent Connaught contracts, but was beaten to the post by Lovell, which paid
£28 million for the right to renegotiate more than 100 of Connaught’s estimated 113 contracts with housing providers. Rather than disappointment at being outmanoeuvred, Mr Wakeley claims he was surprised at the small volume of work it eventually emerged was up for grabs. ‘Connaught talked about having a £2.4 billion order book but nobody has been able to find out where that work has gone - it has evaporated. It did not exist in our view.’
So what has changed in the sector as a result of all this? For a start, Mr Wakeley reports landlords are more anxious to scrutinise contractors’ finances before signing on the dotted line. ‘I’ve not met any customer who has said they are going to in-source because of the failure of Connaught but what we are seeing is more prudent procurement decisions,’ he says.
It seems landlords are taking their lead from the wary financial regulators currently crawling over capital levels at the banks. ‘The level of debt, financial security and balance sheet security has become much more important,’ confirms Mr Wakeley.
The question of whether the era of the large social housing contractor is over is met with a laugh and a confident ‘No’ from Mr Wakeley. ‘Big metropolitan boroughs need to deal with big partners because they need to benefit from the economies of scale they create,’ he argues.
Currently, Morrison holds 42 core social housing contracts, and in the words of Mr Wakeley ‘follows the chimney pots’, working mainly for large councils including Birmingham, Southwark, Lambeth and Northwards Housing, an arm’s-length management organisation which manages 13,000 homes owned by Manchester Council.
Beyond fixing things, Mr Wakeley says his firm attempts to create jobs as it goes - by picking up additional work in the locality of the core housing contracts.
‘We try to create opportunities around the outsourcing, so we start working for the local nursing home, school, hospital or university and find other places to keep the workforce employed,’ says Mr Wakeley, perhaps again attempting to rehabilitate the sector’s tarnished image. ‘We try to develop the skill and export that skill.’
The stated desire to prevent redundancies is somewhat undermined, however, by Mr Wakeley’s admission that he took £5.25 million out of the business by making 30 redundancies when he took over in 2008 - job losses he shrugs off as ‘natural wastage’.
Looking to the future
The Morrison chief’s confidence in the future of his business is boundless - and this despite that hard to shake scepticism in the sector about the high regularity of contracts the company has been winning. A director at one rival says: ‘We don’t win that many contracts and that is a sign of a well-run business. I fear for Morrison.’
Another insists that Morrison is snapping up contracts at a low rate, a sign that it is being ‘fattened up for sale’ by its owner. He predicts this will ultimately lead to a decline in the quality of service as costs are squeezed.
This, however, is not a picture recognised by John Lines, cabinet member for housing at Birmingham Council, a Morrison client. ‘All the contractors have been coming in with keen bids and Morrison’s was not keener than anybody else’s,’ says Mr Lines. ‘I don’t foresee any problems.’
Mr Wakeley insists he has not heard any suggestion that the company is financially insecure, although people approach the business with ‘hare-brained’ schemes to buy it on a regular basis. He returns to his stock defence: ‘The facts are we have no debt, our profits our growing and we have significant cash reserves of £25 million at bank.’
Andy Brown, research analyst at investment banking group Panmure Gordon, agrees cash-holding firms like Morrison are generally in a strong position. But, he adds, ‘Being purely repairs and maintenance means you don’t get advance cash that you get from capital works. You rely on cashflow and that can quickly turn around.’
With a new rent regime to grapple with, as well as changes to planning rules and cuts to grant, social landlords will be hoping Mr Wakeley’s faith in the resilience of repairs contractors is justified. It’s impossible to lose three parents - it remains to be seen whether the same applies to contractors.
Boss talk: What does 2011 hold for repairs and maintenance?
Housing associations have been going away from big contracts and back to smaller projects. We are also seeing organisations look to employ people directly and become contractors. There are opportunities on the public side as long as it doesn’t get any worse, and we think PFI will come back in some form.’
Jeff Adams, chief executive, United House
‘People are being more discerning, and waking up to the fact that they need to be sure the company they are selecting is the right one. ‘That’s about testing whether what they say they do is what they do in reality. There will always be a need for outsourcing.’
Chris Durkin, chief executive, Willmott Dixon
Morrison in numbers
social housing contracts
estimated turnover 2010-11