(adds CEO comments)
By Neil Maidment and William James
LONDON Jan 30 Britain's Serco said 2014
profit could be as much as 20 percent below forecasts, a sign
that the cost of rebuilding the outsourcing group from
high-profile government contract failures is continuing to take
The warning came minutes after Serco's biggest client, the
British government, said it had decided to allow the firm to
once again win new work, ending a six-month hiatus after Serco,
along with rival G4S, charged for tagging criminals who
were not being monitored, in prison or dead.
After a brief rally, shares in Serco, which runs services
from London's light railway to the maintenance of nuclear
weapons, slumped 15 percent on the disappointing guidance,
wiping 340 million pounds off its value.
In total, it has lost 1.2 billion pounds, or just under a
third of its market value, since the initial scandal broke in
July. Since then Serco's woes have been compounded by related
police inquiries, allegations of fraud on a prisoner-escorting
contract and a cabinet review of all its government contracts.
To win back the faith of the UK government, whose work makes
up a quarter of group revenue, Serco has ditched its UK and
group chief executives, committed to strengthening its board and
ethics and is restructuring part of its business in response to
a call from the government for "corporate renewal".
The government said on Thursday Serco's actions, which
include last month's agreement to refund 68.5 million pounds to
Britain's Justice Ministry for the tagging contract, meant it
was now headed in the right direction.
However, in what should have been a good news day for the
troubled firm, Serco then released a statement detailing the
overall impact of a period that has rocked the company and
increased scrutiny on an industry already in trouble after G4S
failed to provide enough guards for the 2012 Olympics.
"We have been through a very difficult period since July of
last year, which has had a major impact on Serco: reducing
near-term growth, diverting management focus, and adding costs
to strengthen the business," acting Chief Executive Ed Casey
said. "We are now able to assess more clearly the adverse impact
that continues into 2014."
10-20 PERCENT DIP IN 2014 PROFIT SEEN
Serco said 2014 adjusted operating profit could now be 10-20
percent lower than analyst forecasts of 277 million pounds. That
comes after the contract problems contributed to Serco lowering
2013 profit guidance in November, and firing an early warning
sign that 2014 numbers would come under pressure.
The group said attrition from lost contracts, volume
reductions in its Australian immigration detention services
contract and less work won across the group in general would
result in 2014 revenue falling by a mid-single digit percentage.
Higher ongoing costs, of about 10 million pounds a year, to
overhaul the business would hit 2014 operating profit, it added,
while margins would be squeezed by the costs of the renewal
programme and by lower revenue. Currency movements were also
becoming an increasing problem, Serco said.
Casey told Reuters that the firm was in the "very late
stages" of appointing a new group CEO, with an announcement
expected in the near term on a replacement for Chris Hyman, who
led Serco for more than a decade before quitting in October.
The government's approval for Serco to start winning work
once more had been widely expected. Serco said it now expected
to compete with rivals for work such as the Northern Rail
franchise extension and a defence contract expected to be
awarded in Feb.
G4S is yet to prove its own "corporate renewal", is still in
talks over the size of the refund on the tagging contract and is
therefore yet to get the green light to be able to win new work.
($1 = 0.6041 British pounds)
(Editing by Kate Holton and Paul Sandle/Mark Heinrich)