Scandal-hit Serco's shares plummet after profit warning
By Christine Murray and Kate Holton
LONDON (Reuters) - Serco , the embattled contractor accused of overbilling the British government, revealed the extent of its problems by announcing heavy one-off charges and a profit warning on Thursday.
The company, which has a temporary CEO and is the subject of seven investigations, said operating profit would fall in 2013 and 2014, setting its shares on track for their worst day of trading since July 2002.
The statement capped a torrid six months for Serco, during which it was accused of fraud by the British government on two separate contracts, forcing out Chief Executive Chris Hyman last month and wiping almost a third off its market value.
Acting CEO Ed Casey accepts that much remains to be done to complete the extensive change in corporate culture demanded by the British government before it will award any new contracts to the company.
"We fully recognise the size of the challenges that we're facing, particularly with our important relationship with the UK government customer, and we're doing everything possible to restore their confidence in us," Casey told Reuters.
Shares in Serco tumbled 15.5 percent to 426 pence by 1357 GMT, their lowest level in more than four years, wiping off about 400 million pounds from the company's market value, which now stands at 2.1 billion pounds.
Government enthusiasm for contracting out services since the 1980s has been a boon for Serco and rivals such as G4S , but the industry has taken on pariah status since last year's London Olympics.
FALL FROM GRACE
The 2012 Games represented the start of the sector's fall from grace. The failure by G4S to hire enough security staff forced organisers to call in the Army and eventually led to the departure of CEO Nick Buckles.
The government's demands for change within Serco came after the justice ministry asked police to investigate alleged fraudulent behaviour by some staff working on a prisoner escorting contract.
Serco, along with G4S, is also being investigated by Britain's Serious Fraud Office over alleged overcharging related to the electronic tagging of criminals. An audit had suggested that the company charged for tagging criminals who were dead, in prison or not being monitored.
Serco has said it will repay any amount due on the contract, which it expects to be in the low tens of millions of pounds, and the reorganisation announced in October was described by the government as a "positive move".
The shake-up included the departure of Hyman after 11 years as CEO and the company has said it could take months to appoint a permanent replacement.
Serco, which provides services from running prisons and hospitals to maintaining nuclear weapons, makes about a quarter of its 4.9 billion pounds revenue from UK government contracts.
"We're encouraged by the government's description of the announcement of our renewal programme ... but frankly we realise, and I realise, that we have a long way to go," acting CEO Casey said.
Casey added that he is not aware of any other material findings from the Cabinet Office review, which he expects to deliver its report in the next few weeks.
MOUNTING PRESSURE
Shares in Serco have lost almost a third of their value since May 16, the day before the tagging problems surfaced.
On top of the tagging repayments, the group said it would take about 45 million pounds of one-off charges in 2013. The impairments are related to external advisers, accounting charges, job cuts and a loss on the disposal of its British occupational health unit.
"The magnitude of today's downgrades highlights the real pressure on this business," Investec's Andrew Gibb said. "Its ability to win contracts in the UK is severely impeded and margins look to be in reverse. Despite today's cuts, this may not be the end to the downgrade trend, given that a new CEO is still to be appointed."
Serco said it expected its 2013 profit margin to be below last year's 6.4 percent.
It also said it would cut about 400 jobs in its UK and business process outsourcing operations.
The problems that have made Serco a household name in Britain have not had a significant impact on other parts of the business, Casey said, but the group does face other challenges in Australia and the United States.
Australian Prime Minister Tony Abbott has said he will turn away boats of immigrants, which Serco says is likely to reduce revenues from its immigration detention centre contract.
It has also suffered from the temporary government shutdown and budget pressures in the United States, where it helps to administer the rollout of the "Obamacare" health laws.
(Editing by David Goodman)
