GardaWorld’s revived bid for G4S is cheap but at least credible

G4S has spent much of the past decade stumbling between blunders. Failure to take suitor GardaWorld seriously could prove to be another one.

The Canadian company went public with a potential £3bn takeover offer for the UK-listed outsourcer on Monday. It did much the same thing 17 months ago, when it announced it was in the early stages of considering an approach to G4S.

The way GardaWorld handled that mooted bid did little to lend it credibility. G4S said it did not even receive a request for information, let alone a bid proposal, in the month it took GardaWorld to pull out. The private equity-backed group was regarded then as too small and with too much leverage to be a serious bidder for G4S, with its bemusing behaviour put down to a strategic play for G4S’s cash handling business.

This time is different. G4S sold its cash business to Brink’s this year. It is now a simpler, easier to swallow company. Net debt in June was down roughly £500m from the same time a year ago.

GardaWorld is a more viable bidder, too. Unlike last time, it has actually made an approach to management — three in fact. Its financial firepower also seems to stretch further, although it is still highly leveraged. Private equity house BC Partners has replaced Rhône Capital as majority owner since the company last had a crack at G4S. Analysts doubted Rhône’s appetite. That GardaWorld has come back with BC’s backing indicates the strength of its desire to do a deal. It says G4S has failed to engage.

Rebuttals are understandable. A takeover at the 190p price GardaWorld proposes looks cheap. G4S consistently traded above that level before February, and its shares have been slowly recovering since. Although the premium is a hefty 61 per cent to the six month average, it is 31 per cent over 30 days. Shareholders could expect more than that in a rising market. Trading has improved in recent months. The structural outlook for the sector post-crisis is good.

That said, G4S’s turnround has been slow and its shareholders long-suffering. Management still has much to prove even after seven years under chief Ashley Almanza. Selling out cheaply would be a blunder. Push the price a bit higher though, and it is continued resistance that would be the error.

Councils can energy companies

Among the latest casualties in the war of attrition engulfing the UK retail energy market are perhaps the saddest, Jonathan Ford writes. Those that went in not to chase a whopping profit, but in the hope of doing social good.

Step forward Nottingham council, owners of the splendidly-named Robin Hood Energy, and its fellow local authority in Bristol, proprietor of Bristol Energy. Both have now joined the 20-odd suppliers that have imploded since late 2016, defeated by a regimen of ferocious competition and margins that are razor thin.

At the start of the month, Nottingham sold Robin Hood’s customer base to British Gas for a pittance after losing £35m since 2015. And last week Bristol transferred Bristol Energy’s customers to Together Energy, itself part owned by Warrington council, for £14m, after losses of £32m.

The councils’ mistake was believing the siren call of one-time Labour leader, Ed Miliband, whose 2013 conference speech railed against profiteering by the Big Six energy suppliers and called for their charges to be capped. What better cause for a socially responsible council than “energy inclusion”, ensuring their poorer residents had access to reasonably priced power?

Meanwhile, their modest cost of capital would allow them to earn a reasonable return and thus help to fund council services, then groaning under the onslaught of austerity.

Unfortunately for the councils, the reality was different. First, those fat profits turned out to be a chimera, as dozens of new venture capital-backed businesses stripped the Big Six of their customers.

Competitors such as Bulb and Ovo slashed prices to build a huge customer base quickly. Last year, Bulb, backed by the Israeli-Russian technology investor Yuri Milner, earned a 1 per cent gross margin on sales of energy. After accounting for its operating costs, it lost £129m.

Granted, some lossmaking businesses have achieved high valuations, such as one of the sector’s only “unicorns”, Octopus Energy (which recently sold a 20 per cent stake to Origin Energy of Australia, valuing it at £1.4bn). But Octopus derives much of its revenue from licensing its own data platform. Council-owned enterprises are not so well endowed with proprietary tech.

Things may get worse before they get better. Many supply companies expect a wave of customer defaults when the furlough scheme ends next month, although that may in turn bring some pricing sanity. (Bulb recently announced it would push prices up).

But there is a bigger lesson for councils in the fate of these investments. It is to think hard before wrapping uncertain commercial ventures in virtuous green vestments. You don’t always do well by doing good.

The item on energy suppliers has been amended to clarify it was Octopus Energy that recently sold a stake to Origin Energy

G4S: [email protected]
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