News Column

Sir Winston Churchill's grandson asks Serco shareholders for £170m

May 2, 2014

Jill Treanor,

Rupert Soames began his first working day as boss of Serco by asking investors to stump up 170m to stave off the company's lenders while he embarks on a nine month strategy review of a business that is mired in scandal after billing the UK government for electronically tagging prisoners who were dead.

The grandson of former prime minister Sir Winston Churchill spoke to City analysts for the first time since accelerating his arrival at Serco from Aggreko.

During his 11 years at Aggreko, its stock market value rose almost tenfold to 4.5bn, gaining the power company a place in the FTSE 100.

In contrast, Soames has now joined a company which employs 120,000 but which has a rapidly shrinking stock market value currently just 1.6bn resulting in its ejection from the FTSE 100 after the dramatic slump in its shares. They fell another 3% to 328p on Thursday morning, down from a 10-year high of 683p last July.

As Soames said the business, whose operations also include the Docklands Light Railway and immigration services in Australia, needed the cash to give him "space and aircover" from the lenders, he said: "I'm sitting here with my satchel, my protractor set , and large pink eraser on my first day at school".

In reality he has already been working behind the scenes with City investors to gauge support for the urgent fundraising which is needed if the business is to avoid becoming "uncomfortably close" to the borrowing terms stipulated by its lenders. Last month the company admitted its debt had increased by 21% to 700m but it now expects this will reach 800m by the end of this year as a result of shrinking cash flows caused by the loss of the contract for tagging prisoners, a fall in contract volumes from the Australian immigration service and rising costs on other contracts.

Even after the 170m share placing the most that can be raised under stock market convention without a full-blown rights issue some analysts questioned whether the share placing would be enough to placate lenders.

"We are not convinced that this will be sufficient given the downward spiral the company seems to be in," analysts at Cantor Fitzgerald said.

Soames described the 170m fundraising as "pragmatic and necessary exercise to give use the headroom to get through a strategy review unscathed by our lenders".

Thursday's early morning call with analysts followed two unscheduled, late night announcements in 48 hours. On Monday it issued a profits warning and warned of the need to tap shareholders for cash. On Wednesday night it put a size on the fundraising, 170m, and a figure on the scale of profit fall perhaps as much as 80m in an announcement that also included the resignation of the finance director Andrew Jenner. ,.

Taking questions from analysts as he launched the placing of 50m shares, Soames admitted that morale at the company was "not as good as it should be" as a result of an overhaul of the business which began in the wake of the scandal and departure of the long-standing chief executive Chris Hyman in October.

The decision to split the UK and European arms, with one section to focus on the "UK government customers" and the other on activities in the wider public sector, had led to a duplication in costs and had an impact on staff. "There is no denying that the events of the past year have been very traumatic for the business," Soames said. "One of my first and more urgent tasks is to help rebuild the management team."

Soames is replacing the temporary boss Ed Casey who was parachuted in from the US operations following Hyman's departure. Casey is to stay as chief operating officer and Soames quipped he had "got over the shock of meeting me and had not yet been physically sick".

Soames said the strategy review was going to look at every aspect of the business, which has operations spanning government contracts and private sector work across many parts of the world.

"I'm conscious nine months might seen like a long time but this a large and complex business." He indicated one of his key measures would be amount of profit being generated from the working capital employed. Identifying the trend for margins will be key, he said, as the business is winning fewer highly profitable contracts and more less profitable ones.

He likened the events of last year and the opportinities they might provide as similar to those faced by Exxon after the Valdez oil spill 25 years ago. Exxon now had an outstanding safety record, he said. Similarly, Serco had an opportunity to show it "learnt the lessons" of its past mistakes.

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Source: Guardian Web

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