Shares in Serco plunged yesterday after the firm’s new chief executive wrote down £1.5 billion from the value of the outsourcing specialist and issued a stark profits warning.
Former Aggreko boss Rupert Soames said the company faced at least two more difficult years ahead as it continues to battle against a series of legacy issues.
He highlighted the impact of several contracts where Serco is making large losses, and areas where the company is sub-scale, and said the future for Serco was as a business to government (B2G) services contractor.
The plan will be financed by a £550 million cash call to investors early next year, on top of the £165m raised in a share placing in the summer.
Mr Soames said the refocusing of the business followed internal reviews carried out since he joined the business in May.
“Whilst it is a bitter pill, it is better for all concerned that we swallow it now and establish a really solid foundation on which to build Serco’s future,” the CEO said.
“As might be expected, the contract and balance sheet reviews have encouraged much turning over of stones and reflects our changing strategy and the latest view of the challenges we face on a few large contracts.
“These challenges, together with a less pronounced improvement in trading our second half than we expected, have led us to a more cautious view of 2014 and 2015.”
Mr Soames said the results of the full strategy review would be made public at the time of the firm’s full-year results in March.
“However, the direction is clear,” he said.
“Serco will concentrate on its core as a leading supplier of public services an international B2G business focused on justice and immigration, defence, transport, citizen services and healthcare.
“These are business which we are really good at, where we deliver outstanding service and where our skills, experience and international reach can differentiate us.
“There are a tough couple of years ahead as we make this transition, but it will be worth it.”
The update included a downgrading of profit forecasts to between £130m and £140m for this year, a figure significantly below the previous bottom-end estimate of not less than £155m.
Investors were spooked by the new estimations and shares collapsed by more than 30% in morning trading, slashing more than £500m off the firm’s market value.
Serco has a significant presence in Scotland, having run NorthLink Ferries on behalf of the Scottish Government since 2012, been operator of HMP Kilmarnock for the Scottish Prison Service, and also holding various outsourcing contracts.
Its profile was raised significantly north of the border in May when it was chosen by Transport Scotland to operate the iconic Caledonian Sleeper rail service.
The franchise will run for 15 years and is expected to generate revenues of £800m for Serco.
Shares in the firm closed the day down 102.1p at 215p yesterday.