April 29, 2014 / 12:05 PM / in 4 years

UPDATE 1-Serco's woes deepen ahead of new chief's arrival

(Adds details, comments)

By Neil Maidment

LONDON, April 29 (Reuters) - 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 outsourcing firm.

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 business.

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 the government.

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)

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