January 8, 2019 / 1:24 PM / 7 months ago

Serco, Mears win $3.7 billion refugee housing contracts in Britain

(Reuters) - Serco and Mears have won contracts totaling 2.9 billion pounds ($3.7 billion) from the British government to provide accommodation and support for asylum seekers, lifting shares in both outsourcing firms.

Valued at 1.9 billion pounds for Serco and 1 billion pounds for Mears, the 10-year contracts were awarded by Britain’s Home Office Visas and Immigration department under the Asylum Accommodation and Support Services Contract (AASC).

Shares in Serco were up 6.5 percent at 108.8 pence at 1253 GMT on Tuesday, while Mears rose 6.2 percent to 360 pence on news of the new contracts, which sources told Reuters last month had attracted few private sector bids.

The British government is awarding contracts worth a total of 4 billion pounds ($5.1 billion) to house asylum seekers, the sources said, but last year’s collapse of Carillion has dampened appetite for riskier projects.

Serco bid for parts of the AASC contract despite having hundreds of millions of pounds in losses in 2016 from its predecessor, when refugee arrivals and costs outstripped budgets baked into fixed contract terms.

“The hope is that ... the risk/rewards on this contract are much more attractive. The structure of the new contract is very different and does not have volume risk and the same level of penalties,” Liberum analysts said.

Annual revenue from the new contract is expected to be about 150 million pounds for Serco in 2020, compared to about 70 million pounds in 2018 on the previous version of the contract.

“In 2020 and thereafter we expect the AASC contracts to be materially positive to both profitability and cash flow”, Serco said in a statement.

Mears, which specializes in social care and housing services, is the only newcomer to the asylum contract since 2012, the sources told Reuters.

Serco has won the contract for the North West of England and the Midlands and East of England regions, where about 20,000 asylum seekers are living.

Mears has been awarded contracts for Scotland, Northern Ireland and the North East, Yorkshire and the Humber.

Reporting by Tanishaa Nadkar in Bengaluru; editing by Jason Neely and Alexander Smith

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