The social housing giant Connaught cannot blame government cuts for its spectacular collapse

AS HE climbed the few short steps to the stage, Stephen Hill was beaming. It was February 2008 and Hill's name had just been read out for the "finance director of the year" prize at the prestigious Quoted Company Awards for his work at social housing maintenance firm Connaught.

No expense had been spared at the bash at London's sumptuous Grosvenor House Hotel and Hill, looking sharp in black tie, was feeling at the top of his game.

The award topped a year of triumphs for Connaught. During the previous 12 months, the Devon-based firm which started life in 1982 as a humble concrete repair specialist, had made the difficult jump from the Alternative Investment Market (Aim) to the official FTSE list.

It was sucking up contracts from housing associations around the country to repair and refit social homes and, after announcing record annual results, the firm's management was enjoying life at the top of the FTSE 250.

Investors could not get enough of the stock market's latest darling and Hill was basking in its success. But two years later, the story could not be more different.

In the biggest corporate collapse since Woolworths, Connaught was last week forced to call in the administrators at its social housing arm - Connaught Partnerships - initially placing a total of 4,400 jobs at risk. Its environmental and compliance divisions were not involved in the collapse but administrators have admitted that vultures are already circling the profitable divisions.

While the Connaught brand may not be as familiar as other recent failures such as Borders book chain and MFI, its services, delivered on behalf of housing associations and local authorities, provided a lifeline for residents up and down the country. The Dumfries and Galloway Housing Partnership was among its biggest clients while it also recently won part of a 1.5 million contract from Renfrewshire Council to refit 300 homes.

Last year, it also became embroiled in a fierce row over a contract with Glasgow Housing Association after it was told just days before taking responsibility for repair and maintenance of social properties in the south of the city that its exposure to workers' pension funds had rocketed by some 17 million.

As revealed by Scotland on Sunday at the time, the contract was handed to council-owned City Building after Connaught and GHA failed to negotiate an eleventh hour deal. The row left a bitter taste in the mouths of Glasgow's social residents amid claims of political interference while CBI Scotland called for an investigation into the messy affair.

But while Connaught has been no stranger to controversy over the years, its collapse last Tuesday has left more than a few lingering questions, particularly among investors who have watched the firm's share price fall from a high of 444p in October to just 10p last month. On Friday many of the firm's contracts were sold to Lovell Partnerships, the affordable housing division of Morgan Sindall Group, saving some 2,500 of the 4,500 endangered jobs, but financial backers, staff and clients are still reeling - particularly employees among the 700 who were made redunandant on Friday morning.

As Panmure Gordon analyst Andy Brown points out, the speed of Connaught's plight from stock market favourite to one of the economic downturn's greatest casualties - in the space of just five months - is baffling.

"Their interim results [at the end of April] were fine, slightly better than we expected. The dividend was increased and they had something like 93 per cent visibility of four-year revenues," Brown says.

In April Mark Tincknell, the firm's founder and chief executive until July, boasted that the interim results were more than fine. Connaught, in his view, was on the crest of another wave.

He told City scribblers that the business was facing a "once in a generation" opportunity to soak up work from the public sector, which was increasingly under pressure to outsource services to cheaper private sector companies.

"I am more motivated, confident and excited about our prospects than I've ever been in the past five years," he said.

But just two months later, Tincknell, who took up the chief executive role after the surprise departure of Mark Davies in January, was singing a very different tune.Most traders were already celebrating the weekend in one of the Square Mile's many pubs when on 25 June - a Friday - Connaught issued a statement 25 minutes before the close of markets warning that the coalition government's emergency budget meant payment on some 31 contracts was likely to be "deferred". As a result revenues in the current financial year were likely to be 80m lower while EBITDA would also be hit by 13m, the firm said.

The statement knocked the City sideways but it would turn out to be only the first in a raft of increasingly bleak announcements from Connaught. Less than a fortnight later, Tincknell announced he was resigning on health grounds while Hill revealed his intention to depart the firm by October.

Sir Roy Gardner, the former Centrica boss who had been drafted in as chairman in May, set about drawing up an urgent recovery plan as Connaught shares haemorrhaged value by the day. He parachuted in four new directors to assist him, including Stephen Billingham, the former finance chief at British Energy and WS Atkins.

Gardner's priority was to restore confidence in the stock, which was once considered one of the safest bets on the market. He launched an independent inquiry into the firm's accounting policies on mobilisation costs for contracts - an issue that had raised eyebrows among a few analysts at the end of 2009 but which the majority did not believe was a major cause for concern.

"Connaught wasn't actually doing anything wrong [with its accounts]," said one analyst. "But let's just say they were using the rules to the fullest extent."

But by the end of July, Gardner was forced to admit Connaught was in need of "urgent" additional funds. He said it was in "constructive" discussions with lenders, including its principal lender Royal Bank of Scotland.

A few days later a consortium of lenders, also including Lloyds Banking Group, agreed a 15m extension to the firm's short-term overdraft facility but the reprieve did not last long and during trading on 6 August, Connaught shares crashed to an all-time low of 10p, valuing the company at just 14m. The dive had been sparked by a further admission from Gardner that Connaught was heading towards a "material loss" in this year's results. The writing appeared to be on the wall and one month later, administrators at KPMG were called in to the Leeds headquarters of Connaught Partnerships.

Although many brokers slapped a "sell" recommendation on Connaught stock when the first signs of trouble emerged in June, many in the City have been left licking deep wounds.

Some of the Square Mile's biggest institutional investors were nursing massive paper losses after the first shock profit warning in June, including its largest stakeholder F&C Asset Management, whose holding had declined in value by 18.6m ($28.8m) only three days after the initial warning. Gardner himself ploughed 500,000 into Connaught shares when he joined the business in May while Tincknell also invested over 1m in the company in recent months.

The firm's rapid decline has left many, not least its employees, braying for blood and on internet forums last week, staff vented their spleen over the firm's strategy. Accusations were flying over how the firm quoted "unrealistic" prices in order to win contracts.

One employee said: "It does seem to be Connaught's model to either buy up the work or the opposition if that is not possible."

Another said: "To put the blame on Government cutbacks is a serious stretch of the imagination - they were in deep trouble long before the cutbacks were announced."

Brown of Panmure Gordon agrees it is unlikely the firm's rapid decline could have resulted solely from government austerity measures.

"If they had been aggressively bidding for work then that would explain why the company has unravelled so quickly," he says. "For any construction or services-type contract, if you are bidding at the wrong price early on, on the basis there will be some change to the contract [later], then that's a very dangerous way of doing business."

He also highlights that rivals including Morgan Sindall and Mears had not had reported any negative effects in the social housing market of public sector cutbacks.

Although it was launched back in July, a lot of attention has also been focused on the Financial Services Authority's probe into a share sale by the managing director of Connaught's Northern division, Peter Jones, two days prior to the firm's first profit warning on 25 June.

Jones pocketed 264,953 through the sale of 68,000 shares on 21 May followed by the sale of 17,839 shares on 23 June.

While administrators this weekend battle to find homes for the other 1,200 workers whose futures remain unclear, fears are mounting over smaller firms, to which the company sub-contracted work. Insolvency experts warn last week's collapse could trigger a domino effect among sub-contractors.

Industry groups such as the CBI, which has long been calling for the reform of public service delivery, are concerned that the high profile administration could be hijacked by unions to argue for contracts to be taken back into public hands.

David Lonsdale, assistant director of CBI Scotland, insists that Connaught is an isolated case. "It is obviously disappointing when any firm is unable to wash its face financially and goes into administration. However, the sheer scale of the financial challenge facing government both in Scotland and across the UK means that politicians and public sector leaders will have to think differently about what public services are provided, how they are provided, and who provides them. Business has a real role to play in helping them achieve this, helping to deliver more affordable and innovative public services."

As economic uncertainty continues to cast a dark cloud over the UK economy this week, experts are warning that Connaught may not be the only titan to fall in the next few months.

Marc Henstridge, UK head of risk, at credit insurer Atradius, insists a raft of further administrations is likely to follow. "The demise of Connaught is a classic cautionary tale. But this could be the tip of the iceberg," he says.