Troubledoutsourcing companySerco Group(LSE: SRP) is in the news once again today,as uncertainty surrounds the troubled groups cash call, which was announced at the end of last week.
In particular, Serco pre-announced last week that it intends to launch afully underwritten 550m equity issue in March, when it completes a strategic review. However, investors have become concerned about the level of dilution now required to achieve this level of funding.
Indeed, Sercos shares have slumped by around 40%, to a ten-year low, since the rights issue was announced. This implies that the company will have to issue more shares than it originally intended, in order to achieve the level of funding required.
And theres little chance that the size of the rights issue will be scaled back. After announcing1.5bn of impairment charges alongside the rights issue last week, Sercos balance sheet is in need of a sudden cash infusion.So the company needs a hefty cash infusion to shore up its creaking balance sheet.
Plenty of uncertainty
Its not just the potential dilution thats concerning investors. There are now plenty of question marks hanging over Sercos ability to compete effectively in the global market place.
Over the past month, problems have continued to emerge with the groups handling of contracts awarded to it over the past few years. These problems include a deal to accommodate asylum seekers,running healthcare services in Suffolk andmaintaining the Royal Maritime Auxiliary fleet.
As the company struggles, City analysts believe that Sercos free cash flow will be negative during 2014 and 2015; bad news for a company thats already running out of cash.
Whats more, City analysts believe that at the current share price, in order for Serco to raise enough cash to bolster its balance sheet, the potential dilution will reduce 2016 earnings per share to only 6p.
In other words, according to current City forecasts, at present levels Serco is currently trading at a 2016 P/E of 27.2. This is an exceptionally high multiple for a company that struggling to turn itself around.
Nevertheless, these figures are only estimates. Its still not clear how many rights Serco will have to issue to raise all the cash it needs.
Despite the uncertainty surrounding Sercos future, the company is trying to change its image: the group has brought on a new CEO,Rupert Soames, and chairman Alastair Lyons who has been chairman of the company since 2010 resigned earlier this week.
Further,Serco plans to sell off a host of businesses and it is hoped that a good business will emerge from the ashes when the turnaround is complete.
Still, theres no denying that Serco has plenty of work to do before its recovery is complete and for the time being, I would sit on the sidelines.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.