Serco plans 170m pound emergency placing, downgrades EPS 37 per cent - UPDATE

30th Apr 2014 20:43

Embattled government outsourcing group Serco announced late on after London markets closed on Wednesday that it planned to raise around 170m pounds to strengthen its balance sheet. Year-to-date performance has been weaker than expected, with the company forced to warn on full year profits on Monday. It now said that adjusted operating profit in 2014 would be not less than £170m, down from guidance £220-250m just seven weeks ago.Adjusted earnings per share expected to be of "no less than" 19p at constant currency with adverse forex movements having a further 1p negative impact, around a 37% downgrade compared to previous guidance of 28p-33p at constant exchange rates.The company said the resulting financial shortfall has made original targets for the second half of 2014 "even more challenging" and therefore required the board to take a more cautious view of projections.As well as warning about its future dividend policy, the FTSE 250 group said its lower projections for the full year put its debt "uncomfortably close" to their limits at the half-year. Rupert Soames, who takes up the role of Group Chief Executive Officer on May 1st said: "The judgement of the likely out-turn for the year has therefore been materially reduced, with a consequent impact on our leverage ratios, which, without remedial action, would be uncomfortably close to their limits at the half-year. "The judgement of the likely out-turn for the year has therefore been materially reduced, with a consequent impact on our leverage ratios, which, without remedial action, would be uncomfortably close to their limits at the half-year."Rupert Soames, who takes up the role of Group Chief Executive Officer on May 1stThe company plans to issue shares representing up to 9.99% of its existing issued share capital, with exact details to be announced shortly but at the current price worth £170m.Soames said the proposed equity placing has a single purpose: "to give us the opportunity to conduct a thorough review of the strategy of the business whilst remaining within the terms of our debt facilities. This strategy review, which has already begun, will take about nine months to complete, and we expect to present the conclusions of it to analysts and investors at the time of reporting our 2014 full year results. I fully expect that this strategy review will enable us to establish a clear path to rebuild for the future."Broker Investec said the conducting of a review "implies that there remains the potential for a rights issue in the next nine months".As per the more immediate issue of the placing, JP Morgan Cazenove and Bank of America Merrill Lynch have been appointed joint bookrunners to complete the placing and began the bookbuilding process with immediate effect .On Thursday morning a disappointed and "incredulous" Investec issued a note that said: "Last night's statement helps to underline the severe pressure this business is under at present, with a 9.99% placing, another huge downgrade to forecasts and not surprisingly, the confirmed exit of the current CFO. "Confirmation that the strategic review is set to take nine months to complete, means that the market will have to wait until the FY14 results in March 2015 for a clear indication of the turnaround story. Given the quantum of downgrades delivered in the past six months, this is a long time to wait."Cantor Fitzgerald added: "Serco has had a spectacular fall from grace, in our view, but we are not convinced that the worst is over for shareholders. "The new CEO has barely got his feet under his desk and, as we expected, Andrew Jenner, group CFO is stepping down. It is therefore a real possibility in our view that we will see more 'kitchen sinking' by the new management team."Shares in Serco were down 3.3% to 328.7p at 09:40 on Thursday morning.OH