Serco Falls Most in 23 Years on $2.4 Billion in Charges

Serco Group Plc fell by a record after the U.K. government contractor cut forecasts, outlined impairments that may total 1.5 billion pounds ($2.4 billion) and announced a stock sale of as much as 550 million pounds.

Serco plunged as much as 36 percent, the steepest intraday drop since the stock began trading 23 years ago, after the company reduced its forecast for 2014 adjusted operating profit by 20 million pounds to a range of 130 million pounds to 140 million pounds. About half the impairment amount is related to goodwill and intangible assets, Hook, England-based Serco said.

“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,” Chief Executive Officer Rupert Soames said in a statement.

Soames, a grandson of former British Prime Minister Winston Churchill, took his post at Serco in May to revive business after the company, which operates some U.K. prisons, was barred from certain public contracts because it had overcharged for the electronic tagging of criminals. The CEO told analysts at a conference today that he wants to reduce Serco’s services to private companies in favor of renewed work for the central government and municipalities.

Serco was trading down 35 percent at 206.8 pence at 3:46 p.m. in London, the lowest price on an intraday basis since September 2004. The stock has dropped 59 percent this year, valuing Serco at 1.12 billion pounds.

Rights Offering

The company, which also runs London’s Docklands Light Railway, plans a rights offering for the first quarter of 2015.

The next two years “are going to be difficult” as Serco sells under-performing assets to “match a smaller business” and exits unprofitable contracts, the company said. A strategy review has found “two strategic missteps:” diversifying away from its main operations and focusing too much on winning new business.

Serco has “failed to manage effectively the fact that over recent years, there have been significant advances in public-sector contracting, particularly in the U.K., with new models that transfer substantially more risk to suppliers,” the company said. “As a consequence, we now have a number of contracts which are making large losses.” Final results of the review are scheduled to be published in March.

Restructuring expenses this year have totaled “a little over” 20 million pounds, including 7 million pounds for closing offices in Hong Kong and the London borough of Richmond, Chief Operating Officer Edward J. Casey Jr. said in the presentation.

Serco will “probably” cut more jobs by the end of 2014 on top of 400 positions already eliminated this year in a program that contributed to two-thirds of the reorganization costs, Casey said. Even so, Serco will need to bring in more revenue rather than just lowering costs to improve earnings, he said.

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