(Adds details, comments)
By Neil Maidment
LONDON, April 29 Shares in Serco slumped
22 percent on Tuesday after it issued a fresh profit warning and
said it needed to raise emergency cash, showing the challenge
awaiting new boss Rupert Soames in turning round the British
Serco was rocked by a scandal last year in which it was
found to have overcharged the British government on a contract
to tag criminals, sparking a ban on new government work, the
exit of its long-serving boss Chris Hyman, a steep drop in its
shares and a big hit to profits.
The firm said late on Monday investors should brace for more
bad news after it had already warned in January that 2014 profit
would be lower than last year's due to fewer new contracts,
underperforming contracts and the cost of improving the
In a vaguely worded statement, Serco warned that a
challenging start to 2014 meant profit expectations could be
materially downgraded and that its balance sheet needed to be
strengthened via a share placing equal to up to 10 percent of
its existing equity.
The drop in its shares wiped around 440 million pounds
($739.6 million) off its market valuation, pushing it to around
1.6 billion pounds. Since the tagging scandal erupted in July,
its shares have halved.
"The road to recovery is likely to be a long one in our
view, even with the highly regarded Mr Soames, who is due to
join the company on May 1, at the helm," Cantor Fitzgerald
analyst Caroline de La Soujeole said in a research note.
The arrival of Soames, a grandson of former Prime Minister
Winston Churchill, was welcomed after he spent 11 successful
years as CEO of power provider Aggreko.
Analysts have said they expect more bad news before he can
effect any turnaround.
A source familiar with the matter said that Soames had been
briefed on Monday's announcement and was fully supportive of the
action the firm has set out to take. Serco is due to post
another update this week, providing shareholders with more
details on the state of the company.
Prior to Monday's announcement, analysts on average had been
forecasting a 2014 pretax profit of 183.51 million pounds,
according to Reuters data, down 28 percent from 2013 and almost
100 million pounds less than in 2012.
Analysts had said Serco might have to strengthen its balance
sheet, given forecasts that its net debt would rise above its
target of 2.5 times its core earnings this year.
The group's ratio of net debt to EBITDA was 2.3 times in
2013, versus 1.5 times in 2012.
Serco's rival G4S, which was also found to have
overcharged Britain on its tagging contract, has undergone a
similar restructuring designed to improve its relationship with
Under its new boss Ashley Almanza, who became CEO last year,
it too boosted its balance sheet with a share placing, giving it
breathing space to implement a wider shake-up of the business.
Both G4S and Serco, which runs services in over 30 countries
from managing prisons and light railways to air traffic control
centres, remain under investigation by Britain's Serious Fraud
Office over the tagging contract.
($1 = 0.5950 British Pounds)
(Editing by Kate Holton and Jane Baird)