Abel Danger Drives a Silver Stake Through Serco's Corporate Heart - Serco's Shares Plunge - Tagging Scandal - Have a Nice Day, Rupert Soames - Building Serco's Future?

Source: The Telegraph

Serco issues profit warning and plans £550m rights issue

Serco shares plunge as the troubled outsourcer caught up in the tagging scandal warns on profits and announces plans for rights issue to shore up finances

Rupert Soames, who took over as chief executive of the FTSE250 outsourcer, earlier this year

More than half a billion pounds was wiped off the market value of Serco this morning after the support services group announced its fourth profit warning of the year and said it would launch a rights issue.

Shares in the outsourcer plunged more than 30pc to 220p as investors took flight following the latest update from the embattled FTSE 250 company.

Serco - which was last year caught up in a tagging scandal where it charged the government for monitoring criminals who were back in prison, had left the country or were even dead - said it was cutting its forecast for adjusted operating profit for this year by £20m to between £130m and 140m. It also warned that it was downgrading its outlook for 2015.

A review of the group's contracts and balance sheets has also revealed impairments and further provisions are likely to total about £1.5bn, about half of which is related to goodwill and intangible assets.

The impact of these contract provisions are likely to affect Serco's banking covenants and the company said it would be starting negotiations with its lenders to counter this.

Serco also said it was planning to sell businesses not core to its future strategy, including the majority of its private-sector business processing operations.

The company also said it was planning an equity rights issue of up to £550m in the first quarter of 2015 as it attempts to strengthen its balance sheet.

In May Serco raised £160m with a placing of 49.9m new shares at 320p, having days earlier issued its third profits warning of the year that predicted operating profits of £170m, down from the £220m to £250m it had forecast seven weeks before when it published its annual results.

What Serco called a series of "self-help" measures to get net debt to 1-2 times earnings before interest, tax, depreciation and amortisation over the medium term will also be introduced. One of the first parts of this is not paying a final dividend, and controls on day to day working capital will also be strenghtened.

Rupert Soames, chief executive officer and the grandson of Winston Churchill, said: "The rapid progress we have made in recent weeks on the strategy and the contract and balance sheet reviews has brought us to the point that we are able to provide an initial estimate of the impairments, write-downs and onerous contract provisions that are likely to be required at year end.

"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."

Secro's share price over the past six months. Source: Bloomberg

As the shares crashed to their lowest level in a decade, analysts slashed their target price for the shares but did praise some of the news.

Cutting its target for the shares by 90p to 210p, Liberum called the writedowns “massive” but said Mr Soames, who was announced as the new chief executive in February, “quickly and decisively to get the business back on track”.