Phoenix uncovers accounting hole at Servo

Somewhat unnerving news from infrastructure support services group, Phoenix, advising that they have discovered ‘the mis-statement of a number of accounting balances within Servo Limited and its subsidiaries over a number of accounting periods’. Servo is the mid-market managed services arm of Phoenix, which was rolled in with business continuity division, ICM, at the back end of 2010 (see Phoenix to become a business of two halves (again)!).

Phoenix has appointed PwC and Nabarro to do the digging, and expects to announce a £14m asset restatement. Bar any further business disruption, management expects FY13 EBITDA in the range of £38-44m which, though below market expectations, would still be materially higher than the prior year’s £33m. The restatement is not expected to affect Phoenix’s banking covenants.

Servo has long been the ‘poor relation’ among Phoenix’s businesses (see Phoenix’s balancing act), and the least profitable part of the group. Last year, Servo’s revenues fell by 7% and underlying operating margins dropped to 8.2%, well below the other divisions. A few months after coming on board a year ago, CEO David Courtley announced that all of Phoenix’s operations would be unified under the single brand (see Phoenix IT: tough outlook prompts reorganisation). This has not been without its challenges (see Phoenix: Q1 wobble but full year unchanged) which makes today’s news all the more unsettling. Indeed, Phoenix’s shares are down 36% as I write.