The outsourcing group Mitie has bought its rival Interserve’s facilities management arm for £271m in a deal that will merge two major government contractors.
The acquisition will make the combined organisation, which will provide services to several government departments, the largest facilities management company in the UK, with more than 77,500 employees.
It will give Mitie “strong positions in UK government and UK defence services and expertise in delivering large, complex contracts” for departments including the Ministry of Defence and the Department for Environment, Food and Rural Affairs, the company said in an announcement this week.
Around 44% of IFM’s revenue came from its central government and defence division in 2019, Mitie said.
“Interserve Facilities Management enjoys strong relationships with the Ministry of Defence and other government customers and stakeholders, with high retention rates and a high proportion of engineering and security services contracts at attractive margins,” Mitie said.
IFM also has “particularly strong positioning” with hospitals, including PFI contracts. In all these areas, Mitie said it had “ limited presence and scale today”.
Mitie's contracts with government include prison facilities management services for the Ministry of Justice, and it is the largest provider of immigration removal centre management and operations and secure escorting services for the Home Office. It signed a three-year contract in February to provide security services to the Home Office.
The merger comes just over a year after Interserve was sold in a pre-pack administration deal to creditors including banks RBS and HSBC, and investors Emerald Asset Management and Davidson Kempner Capital.
The company had been on government watch for more than a year amid concerns it could collapse like fellow outsourcing giant Carillion.
Interserve provides facilities management services to several government departments, including the Department for Work and Pensions, the Department for Transport and the Foreign Office.
Last year it was involved in a payroll dispute with maintenance and cleaning staff at the FCO headquarters on King Charles Street in London, who went on strike over pay and cuts to terms and conditions.
Both Interserve and Mitie were involved in setting up the NHS Nightingale hospitals – the temporary facilities created to treat acute coronavirus patients.
The deal is expected to lead to some job cuts, as it includes a plan to save £13m through "rationalisation of overlapping headcount in the UK".
Mitie said it expected fewer than 600 back office, sales and business development, finance, human resources roles to be “rationalised” across the group in the three years after the buyout.
The company said it also planned to generate “additional revenue synergies” by selling more services to its existing customers through “cross-selling of bundled services”.
“In addition, it will seek to improve the technology offering to non-overlapping clients in particular in the public sector space, thereby improving service quality and increasing customer retention,” it said.
Mitie chief executive Phil Bentley said: "This will be a transformative acquisition, expanding the scale and footprint of our business to create the UK's largest facilities management company and accelerate the delivery of Mitie's long-term, technology-led vision.
"The transaction will better balance our public and private sector divisions, driving greater returns from the investments we have made in technology and customer service over the past three years.”
Interserve Group Limited will retain its three remaining divisions: Construction; Interserve Construction Limited and Equipment Services, which trades as RMD Kwikform; and Citizen Services.
The transaction comprises £120m in cash and a 23.4% shareholding in Mitie and is subject to approval by Mitie’s shareholders.
Mitie will also be engaging with the Competition and Markets Authority as part of the merger process.
The merger is not expected to affect services to government departments, a Cabinet Office spokesperson said.