British Outsourcer Serco Looking for Acquisition to Beat the Market Blues

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British Outsourcer Serco Looking for Acquisition to Beat the Market Blues

 British Outsourcer Serco Looking for Acquisition to Beat the Market Blues

Summary

  • Given the less outsourcing business available, many firms are seeing their businesses shrink to unsustainable levels.
  • Serco’s primary business, of providing outsourcing services to public sector and the government has come under pressure due to the pandemic, as both have restricted the work they award to private vendors.
  • The company has fared well during the lockdown compared to its competitors as it was able to secure a £157 million contract from NHS, which it is likely to use for inorganic growth.

The outsourcing industry in the United Kingdom has shrunk significantly due to pandemic like most other sectors. The number of contracts being awarded by the government and the public sector has come down drastically, as funds are being directed to more productive expenditures. Also, the number of people using public amenities because of the risk of catching the infection has brought down the need for regular maintenance.

The above situation has made the financial condition for many companies in the sector vulnerable who are now seeking M&A opportunities to weather the difficult economic period.

Given the less outsourcing business available, many firms are seeing their businesses shrink to unsustainable levels. This has led to many predicting a wave of consolidation in the industry. Serco Group Plc, one of the prominent players of this industry, whose primary business, of providing outsourcing services to public sector and the government has also come under pressure due to the pandemic, as both have restricted the work they award to private vendors. However, Serco is in a much better position compared to its competitors because of a massive £157 million contract it won from the NHS to provide its services from February to September.

Serco trying to use the pandemic opportunity to get inorganic growth

Leveraging on its strong financial position and the weaker state of affairs of most of its competitors, the company is on an acquisition drive, for inorganic growth. Serco, which has been active on the M&A scene for some time now has made several successful as well as unsuccessful bids in the recent past to acquire companies in the UK as well as abroad. The company had made two attempts to acquire rival British firm Babcock plc, one in 2018 and another in 2019, both times facing rejection. However, it tasted success when it was able to acquire US Defence engineering company Alion's naval defence Unit for a consideration of $225 million, which had an existing order book of $600 million.

If the company succeeds in bringing some good businesses to its fold through its acquisition drive, it will position it among the most dominant global players in this industry. The flow of business into this sector, which is under severe stress currently, will make a sharp comeback once the situation on the pandemic front improves. Many of the regular outsourcing businesses which have been held up due to the pandemic will create a great demand for these services as and when the conditions improve.

The Shrinking business opportunities in the outsourcing sector

The outbreak of the pandemic forced most of the human activities across the world to be restricted. As people were forced indoors, still most of the government, military and public sector establishments are either shut down or are functioning at significantly reduced capacity levels. Thus the demand for support services is also reduced proportionately, leading to massive loss of business and redundancies in the companies providing these services. Though there is no doubt that this market will bounce back, until that happens, many players might have to shut shop if they are not able to withstand the financial stress. Though the government has provided support to the industry in the form of coronavirus business interruption loan scheme (CIBIL) and the furloughing scheme, it may be inadequate for many to weather through the slowdown. Thus an effective alternative to deal with this deteriorated situation is for the companies in the industry to join forces by consolidating and facing the storm stronger.

The Share price performance of Serco Group Plc (LON: SRP) on the London Stock Exchange

(Source – Thomson Reuters)

The shares of Serco Group Plc have been volatile on the London Stock Exchange since the beginning of the year. On 2 January 2020, the shares of Serco Group Plc were at GBX 164.50, they started falling sharply as the coronavirus pandemic started to spread rapidly in the country during the first two weeks of March. The shares reached a low of GBX 102.50 on 19 March 2020 before making a sharp recovery to GBX 126.80 on 26 March 2020 on the back of the massive order the company received from NHS. The stocks of the company continued to rally steadily from there and reached a high of GBX 169.50 on 5 August 2020, before falling sharply again. On 22 September 2020 (GMT+1 10:50 AM) the shares of the company were trading at GBX 126.50 which indicated an up move of 1.93 per cent compared to the previous day’s close.

Latest Financials

In its half-yearly report published on 6 August 2020, the company has reported a substantial improvement in its business in the first half of 2020. For the six month period ended 30 June 2020, the company reported a revenue of £1,822.2 million, compared to revenue of £1,475.5 million for the corresponding previous year six-month period, registering a growth of 24 per cent.

The reported operating profit of the company for the period stood at £89.1 million compared to £17.2 million reported for the corresponding period last year, registering a growth of 418 per cent. Similarly the reported diluted earnings per share of the company for the first six- month period in 2020 stood at 5.66 pence compared to a loss of 0.15 pence that was reported for the corresponding period last year.

(All the growth percentage figures are reported on constant currency basis)

Encouraged by the strong performance in the first half of the year, the company has maintained its revenue projection for the full year of £3.7 Billion and underlying trading profit to lie within a range of £135 million and £150 million.

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