10th Nov 2014 07:25
LONDON (Alliance News) - Outsourcing company Serco PLC Monday cut its operating profit guidance for 2014 and 2015, said it would book about GBP1.5 billion in impairments and onerous contract provisions, and said it would talk with its lenders about amending the covenants on its debt as it proposed a equity rights issue to shore up its balance sheet.
The news comes as new Chief Executive Rupert Soames tries to turn the business around after a year in which it was hit by issues with UK government contracts. He has been conducting a review of the business, it contracts and balance sheet, and Monday said its future would be to focus on government work internationally.
A review of contracts and the balance sheet has identified likely impairments and onerous contract provisions of GBP1.5 billion, half related to goodwill and intangible assets, the company said.
Serco cut its 2014 adjusted operating profit forecast by about GBP20 million to between GBP130 million and GBP140 million, even before the impact of the contract and balance sheet reviews. Its outlook for 2015 has also been reduced, though the company didn't say by how much.
It said it would hold talks with its lenders to negotiate amendments to the operation of covenants and said it was targeting a medium-term capital structure of one- to two-times net debt to earnings before interest, tax, depreciation and amortisation.
It is proposing an equity rights issue of up to GBP550 million in the first quarter of 2015, which will be fully underwritten by Bank of America Merrill Lynch and JP Morgan Cazenove.
Serco also said it will sell off businesses that aren't part of its future, including most of its private sector business process outsourcing operations.
"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," Soames said of the initial estimate of the impairments and writedowns the company will book.
"As might be expected, the Contract & 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 in our second half than we expected, have led us to a more cautious view of 2014 and 2015," Soames said in a statement.
The CEO said the company's review is continuing and it expects to complete it by next March.
"However, the direction is clear: Serco will concentrate on its core as a leading supplier of public services - an international B2G business focused on Justice & Immigration, Defence, Transport, Citizen Services and Healthcare. These are businesses 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," he said.
By Steve McGrath; [email protected]; @stevemcgrath1
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