Serco Misses Prison Contract as U.K. Government Withdraws Tender

Serco Group Plc missed a contract worth as much as 30 million pounds ($48.6 million) a year to run three U.K. prisons after the Ministry of Justice canceled the tender amid a criminal probe into the company’s billing.

The awarding of the contract to run the Hatfield, Moorland and Lindholme prisons in South Yorkshire was delayed in July after the ministry announced it was investigating Serco over claims the services provider overcharged the U.K. government for tagging criminals. The Hook, England-based company was the leading bidder for the contract.

“The impact of the delay and the uncertainty this has created mean that for operational reasons we cannot postpone the outcome of the competition process any further,” Justice Minister Chris Grayling said in an e-mailed statement. “The competition for these prisons will cease” and all three prisons will be managed by HM Prison Service, he said.

Serco has been restructuring its U.K. business and replacing top executives in a bid to restore its reputation in the country that generated more than half of its 2012 revenue. Former Chief Executive Officer Christopher Hyman resigned last month and Jeremy Stafford, the group’s chief executive for the U.K. and Europe, announced he was stepping down yesterday.

Serco agreed to an audit of all its government contracts after irregularities were found over payments to it and peer G4S Plc for tagging prisoners on release programs and defendants freed on bail. The Ministry of Justice in August gave Serco three months to undertake “corporate renewal,” and threatened to exclude the company from any future government work if the changes are unsatisfactory.

Eroded Gain

The announcement eroded a gain of as much as 3.5 percent in Serco’s share price today after analysts at Credit Suisse Group AG and Oriel Securities Ltd raised their recommendations for the company. Shares were trading up 0.5 percent at 440.6 pence at 1 p.m. in London, valuing the company at 2.2 billion pounds.

Hector Forsythe, an analyst at Oriel Securities, said Serco had made “significant change to address the corporate renewal requirement.” The investment bank raised its recommendation for Serco to hold from reduce with a target price of 439 pence.

“The rational response by the government should be to ensure that Serco is a viable supplier to maximize competition in bidding,” Forsythe said.

Serco spokesman Marcus De Ville said in an e-mail the company estimated the value of the Yorkshire prisons contract at 20 million pounds to 30 million pounds annually.