'Darkest hour' for Serco chief Rupert Soames as depth of crisis at embattled outsourcing giant laid bare

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The depth of the crisis at embattled outsourcing giant Serco was laid bare yesterday.

In an astonishing update, the company issued a profits warning, wrote down £1.5billion from its business, announced a £550million rights issue, and warned it would not grow for two years.

Shares fell by a third, wiping £585million from its stock market value. The stock has fallen two-thirds in 12 months, and is now at its lowest level for ten years.

Hard times: Rupert Soames, grandson of Sir Winston Churchill, described the Serco's fall from grace as its ‘darkest hour’

Chief executive Rupert Soames, said previous managers had made a series of ‘strategic mis-steps’ that meant the business spiralled out of control. He vowed to slim down the company, cutting jobs, selling off divisions it did not want and focusing on growing its Government work.

Soames, grandson of Sir Winston Churchill, described the firm’s fall from grace as its ‘darkest hour’.

When he arrived in April the former Aggreko boss vowed to clear out the rot left by previous executives at the group, and immediately began a major review into its operations.

‘We walked up the Serco high street saying, “bring out your dead”, and rather a lot of bodies came flying out of the windows,’ he said yesterday.

He added: ‘The next two years are going to be difficult and we expect our revenue to reduce over this period through disposals and exiting loss-making contracts, following which we expect to be able to start growing again.’

He warned that annual revenues – which were £5.1billion last year – could fall to as low as £3billion, while margins would come down to just 2 per cent - 3 per cent over the next two years. Annual operating profits this year will be £20million lower than expected at £130million-£140million, he said.

Serco has been embroiled in fraud and corruption probes, was briefly suspended from some Government work and has lost the vast majority of its senior management in the space of two years.

Soames’ review finishes in May, but yesterday he said: ‘We are at a point that we are able to provide an estimate of the impairments. While it is a bitter pill, it is better for all concerned we swallow it now and establish a solid foundation on which to build Serco’s future.’

Analyst Andrew Gibb at Investec said: ‘Management are doing the right things, but this is going to be an expensive and long-term turnaround with risks still ahead.

‘It is important to note this might not be the end of the bad news and that any turnaround is going to be a long process.’

The group is also having to renegotiate with its banks to make sure it does not breach the terms of its loans. 

From bad to worse: Serco has been embroiled in fraud and corruption probes, was briefly suspended from some Government work and has lost the vast majority of its senior management in the space of two years

It has written down £1.5billion from its business, with £450million coming from loss-making contracts of which £200million is from the UK.

In the UK, the group said that four Government contracts had made heavier losses than expected.

The four affected areas are its asylum seeker support contract, its work for the Royal Navy, transporting prisoners to court and running the Government’s ‘Big Society’ work.

In addition, the group will raise £550million in the spring by offering new shares to existing investors.

In the most open criticism of his predecessors to date, Soames said the company had ‘diluted its operational excellence’ by expanding too fast. It had also put too much emphasis on winning new business and not enough on doing its existing jobs well.

Businesses earmarked for sale include its waste management arm, a business that runs leisure centres and tourist attractions such as Bisham Abbey in Berkshire, and its private sector outsourcing arm. 

But the company will maintain an international spread with businesses in the US, Australia, New Zealand and the Middle East.

Shares fell 102.1p yesterday – some 32.2 per cent – to 215p, their lowest since August 2004.