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Serco shares plunge after outsourcer issues fourth profit warning Serco shares plunge after the outsourcer, which runs everything from prisons to Boris Bikes, issues fourth profit warning
(about 1 hour later)
Shares in scandal-hit Serco plunged more than 30 per cent after the company, which operates everything from prisons to Boris bikes, issued its fourth profit warning this year.Shares in scandal-hit Serco plunged more than 30 per cent after the company, which operates everything from prisons to Boris bikes, issued its fourth profit warning this year.
The troubled outsourcer plans to raise £550 million through a rights issue after posting a new profit warning and writing down the value of its business by £1.5 billion. The firm was also forced to write down the value of its business by £1.5 billion – when the whole company’s market value was just £1.7 billion - as it sells off scores of division at a loss to try to turnaround the business.
A review by chief executive Rupert Soames, the grandson of former Prime Minister Sir Winston Churchill, has identified likely impairments and further onerous contract provisions totalling around £1.5 billion, with half of that related to goodwill and intangible assets. The cacophony of bad news saw new chief executive Rupert Soames declare: “Talk that the government is soft on contractors is belied immediately when you see our results.”
Soames was brought in earlier this year to turnaround the embattled business which has been hit by a raft of problems due to failed contracts. Serco is now planning a £550 million rights issue at the start of next year, after it slashed its profit forecast for this year by £20 million to as low as £130 million, and cut next year’s outlook. The lower profits mean the FTSE 250 firm is set to breach a borrowing covenant, forcing it into talks with lenders to amend its conditions.
Serco, which operates everything from prisons to Boris bikes, cut its forecast for 2014 adjusted operating profit by around £20 million to £130 million to £140 million. It also cut its 2015 outlook. After starting at Serco in May, Soames had planned a major strategy update next March, but today told the Standard: “When we saw the scale it, we had to put it on the table earlier and face up to it.”
Serco last year agreed to pay back £68.5 million to government after it was charged with overpaying for tagging criminals. He dismissed talk that he was “kitchen-sinking” – highlighting negative news so that performance and the share price can only get better – saying: “Like the story of the three bears and their porridge, this update is neither too hot not too cold but just right. These very large numbers [of impairments] will come as a bitter pill to all concerned, but they’re better faced up to.”
More follows Serco is still paying for the massive clean-up operation after it overcharged its biggest customer — the taxpayer — by tens of millions of pounds, claiming it had tagged criminals who were actually dead or imprisoned. It faced a six-month ban on government contracts and is now spending millions to “do whatever is necessary to fix the operational performance” to keep its biggest customer on side.
“In our business, we have very long contracts,” Soames added. “If you have one losing even quite a small amount of money, and it has another 10 years to run, you end up quickly with large losses.”
Soames said Serco was suffering from Ministers’ improved ability at driving a bargain: “the Government has got much more adept at writing contracts and transferring risk to the private sector,” he said. “The UK is now to government contracting what Silicon Valley is to IT. And bluntly, we have been caught on the wrong end of a lot of that risk transfer. Contracts that have gone wrong for us in UK and it’s costing us a lot of money.”
He hinted that new deals would be pricier for the taxpayer: “This can’t go on for ever,” he said. “There’s a pendulum that has swung from one end to another, presumably it will swing back.” Serco added that it was “learning to say "no" when we think risk outweighs reward.”
Shares – which stood at 674p before the taxpayer scandal broke last summer - fell 93.6p to 223.5p.