A cash-strapped college that recently got a government warning about its finances went ahead with a “costly” merger despite a report critical of the move, it has emerged.

Under-fire K College, in Kent, has a £6.4m deficit and in August became the first provider to get a government warning that could lead to the withdrawal of Skills Funding Agency (SFA) cash.

It was formed of a merger in April 2010 between South Kent College and West Kent College – but just five months earlier a report, seen by FE Week, warned about the move.

It appears to have been written by a senior figure at the Learning and Skills Council (LSC) – the predecessor body to the Skills Funding Agency (SFA) – and refers to criticisms in an earlier due diligence report on the merger by South Kent College.

“This [earlier] report highlighted that West Kent College faces significant financial challenges and lacked spare cash reserves to support the merger,” said the LSC report.

“The merger appeared to be in trouble if the Learning and Skills Council could not offer merger support or the governors of West Kent College decided to reject the merger due to a lack of willingness to borrow funds.”

The LSC report further mentioned a report by accountants KPMG to support their criticism of the merger.

“I could not quickly identify the business case for this merger when reading this document although I appreciate that there are always generic valid reasons for merger, including economies of scale,” said the LSC report.

An SFA spokesperson declined to comment on the report, but said: “The consultation for the South Kent College and West Kent College merger was handled in line with the Department for Business Innovation and Skills (BIS) and the former LSC’s merger process that was in place at that time.”

Nobody from K College was immediately available for comment.

However, the college’s website stated South Kent College governors chose West Kent College as their preferred merger partner following a KPMG report commissioned in 2008 by the LSC, which recommended merger as the best course of action for South Kent College students.

The college’s financial problems saw principal Bill Fearon resign on the same day staff went on strike over plans to cut around 150 jobs.

FE Minister Matthew Hancock has also been in talks with local MPs on the future of the college, while a spokesperson from the Department of Business, Innovation and Skills (BIS) said de-merging the two colleges remained an option.

The college has blamed its deficit on falling student numbers, funding cuts from central government, the cost of running six sites and a delay in money owed from the sale of land.

The college was asked by the SFA to work with Learning and Skills Improvement Service to balance its budget in the next two years having been issued a notice of concern.

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