De La Rue Plc, the world’s biggest printer of banknotes, said it is set for prolonged talks with a major government client affected by a deliberate breach in paper quality last year.
Supplies to the client remain suspended for now, De La Rue Chief Executive Officer Tim Cobbold, declining to identify the buyer for confidentially reasons. Francois-Charles Oberthur Fiduciaire SA, which this week abandoned a takeover approach, named the De La Rue client as the Reserve Bank of India.
“With the type of customers we have, necessarily there are a lot of bodies and parties involved in decision making,” Cobbold said in a telephone interview today. “It takes longer than might be normal in a corporate environment.”
De La Rue’s reputation remains intact, with a comparable inflow of contracts and business levels meeting targets, Cobbold said. In July, the company found evidence of falsified paper quality certificates for some banknotes. De La Rue lost one-quarter of its market value in the following month.
Shares of the Basingstoke-based company declined 1 percent to 691.5 pence as of 11:25 a.m. in London, valuing it at 684 million pounds ($1.09 billion).
“Given the nature of the business, and the customers that we work for, there might be an impact,” Cobbold said. “We haven’t seen any evidence yet.”
The company last week rejected an approach of 926 million pounds, or 935 pence a share, from Oberthur. The Paris-based company’s offer budgeted for the possible loss of the Indian contract, it said.
“There’s reputational damage that’s come through from the fraud,” London-based Panmure Gordon analyst Paul Jones said. “It’s too early to say categorically there’s been no effect on contracts or margins, as they’ve not gone through a whole contract renewal cycle yet. They’re short on detail and long on innuendo at the moment.”
The company estimated volumes in the currency division were about 6 billion printed banknotes last year, with 10,000 metric tons of banknote paper.
Currently outsourced paper production may be brought back within De Le Rue to utilize excess capacity if the large government contract is cancelled, Cobbold said.
“The customer concerned purchased a large quantity of paper from us, and when you are not supplying for that customer it leaves a gap in the production,” the CEO said. “Were supplies to cease on a permanent basis, investors will be interested in what we might do to fill that gap.”