Churchill heir vows to begin Serco's long road to recovery

By Neil Maidment

LONDON, May 1 (Reuters) - The grandson of Winston Churchill delivered his own brand of fighting talk on his first day as boss of British outsourcer Serco, pledging to reverse the "severe damage" caused by contract scandals and put "a spring in the step" of staff.

Serco was rocked last year when it was found to have overcharged the British government on a contract to tag criminals - sparking a ban on new government work, the exit of its long-serving boss Chris Hyman, a drop of almost 1.7 billion pounds in its market value and a big hit to profits.

Late on Wednesday the firm said a detailed review of contracts and its work prospects had revealed the extent of the damage, forcing it to downgrade 2014 profit forecasts for the third time and launch a share placing to raise cash.

"The reason I joined the company is because I believe the chances of not being able to produce a good plan is next to zero," new Chief Executive Rupert Soames said on Thursday, just eight hours into the job, having joined from power firm Aggreko (LSE: AGK.L - news) .

"There is an opportunity that investors will give management to take a deep breath, do a proper strategy review and come forward with a plan."

Serco runs services in over 30 countries from prisons and air traffic control centres to school inspections.

Asked what his priority beyond stabilising the firm in a home market that makes up half of its 4.8 billion pounds revenue, Soames - grandson of the famous wartime British prime minister - said its beleaguered staff needed reinvigorating.

"Events of the last year have caused severe damage to this business ... A priority is to try and get a spring in the step of Serco people and make them feel proud again."

The appointment of Soames was widely welcomed, although his nine-month strategy review, which is set to conclude next March, illustrates the lengthy road to recovery flagged by analysts.

"I'm sitting here with my satchel, protractor set and a large pink eraser on my first day at school," said Soames, whose jovial tone belied the scale of the task ahead.

"I joined the company because I am sure there is a terrific business here," he said in a call to analysts and investors.

Serco expects 2014 adjusted operating profit will now be "no less than 170 million pounds", as much as 32 percent below March guidance of 220-250 million pounds, itself a downgrade. In 2012 operating profit was 315 million pounds.

The company said the drastic fall was due to significant reduction in margins on renewed contracts, the cost of fixing underperforming contracts, restructuring, and fewer new business wins caused by the controversy of the tagging scandal, which remains under investigation by Britain's Serious Fraud Office.

"SPECTACULAR FALL"

Soames, who similarly launched a nine-month strategy review when he became boss of Aggreko over a decade ago that led to a hugely successful period for the firm, said all parts of the group would come under scrutiny so it could focus on growth areas and determine what may no longer be core.

To avoid stretching its debt facilities and to buy himself time, Soames launched a placing of new shares representing 9.9 percent of its existing stock, which raised 160 million pounds on Thursday.

But analysts said that might not be enough to fund Serco's turnaround plans.

"We are not convinced that this will be sufficient given the downward spiral the company seems to be in," Cantor Fitzgerald analysts said. "Serco has had a spectacular fall from grace but we are not convinced that the worst is over for shareholders."

The new profit forecast is dependent on a much improved second half of the year for Serco, pinned on improvements to poorly performing contracts, cost savings and new work.

The company said it had a pipeline of new work up for grabs in 2014 and 2015 worth around 11 billion pounds, comprising of 35 to 40 contracts including local government ferry and rail work and two large non-defence contracts in North America.

The tagging fiasco - when alongside rival G4S (LSE: GFS.L - news) the firm was found to have charged for monitoring criminals who were dead, in prison or had not been tagged at all - led to Serco paying back 68.5 million pounds to the government.

Serco also paid back 2 million pounds for a prisoner escorting contract scandal after staff were found to have recorded prisoners as having been delivered ready for court when in fact they were not.

The laboured turnaround at Serco expected by analysts is similar to that of G4S, also recovering from the tagging fiasco. Like Serco, G4S (Copenhagen: G4S.CO - news) - the world's No.1 security firm - has a new chief executive, and has spent recent months restructuring vast parts of the group, raising cash to allow itself time to do so.

In March G4S said it would repay about 109 million pounds to the government for its part in the tagging scandal.

(Editing by Pravin Char)