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The Globe and Mail

Security firm’s Olympic failure slashes half-year profits

Members of the armed forces walk past the perimeter of the Olympic Park in Stratford, east London, July 15. The government had to deploy additional troops after it became clear security firm G4S was unlikely to fulfill its contract for 10,400 guards.

Andrew Winning/REUTERS

When G4S released its 2011 annual report, the new Olympic stadium was showcased on the front cover and the slogan "official sponsor to the London Olympics" was emblazoned on the company's public relations material.

Three months later, the world's biggest security company – by profits, sales and employees – was left nursing a 60-per-cent fall in half-year pre-tax profits as the trophy contract became a bruising liability.

Nick Buckles, the chief executive, put on a brave face as he delivered the group's first half-results on Tuesday, insisting he did not think G4S's business in the rest of the world would be affected by its failure to deliver the 10,400 security guards it had been contracted to provide for the London games.

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"Outside of the U.K., we think it will make little difference to underlying performance," he told the Financial Times – pointing to an increase in the company's worldwide bid pipeline from £3.5-billion in April to £3.8-billion at the end of July. G4S now generates 31 per cent of sales in developing markets and wants to increase this to 50 per cent by 2019, targeting Africa, China and India.

But in Britain – where the company traces its roots back to four bicycling security guards in 1935 – it has been a different story: G4S has been forced to reveal that its U.K. pipeline fell from £760-million to £565-million in the three months that the Olympics fiasco dominated headlines.

Analysts said that, with a profits warning delivered only in July, it was not yet possible to assess the long-term impact on the company. "It's too early to say," said Kean Marden, head of business services equity research at Jefferies International. "I think it's sensible to suspend judgment until procurement teams return from their holidays."

While the first major test may be the U.K. government's willingness to award prison contracts to the company – a decision is expected in the autumn – G4S has several hurdles to jump before then. Not least is the successful delivery of security for the London Paralympic Games, which start on Wednesday. The company is supplying 5,000 staff across 70 venues.

A further challenge will come when Mr. Buckles, who was hauled before parliament to explain the company's failings before the Olympics, gives further evidence to the home affairs select committee on Sept. 11. This will be followed by the publication of a PricewaterhouseCoopers report into the company's Olympic failings, commissioned by the board, which is expected at the end of September.

Despite Mr. Buckle's keenness to point to growth opportunities outside the U.K., Caroline de La Soujeole, analyst at Seymour Pierce, said it was essential that it rebuilds its reputation in the U.K. "Some 10 per cent of group sales are generated from the U.K.'s public sector and just under half of the U.K.'s bidding pipeline is for government work."

Mr. Buckles said the company was "looking to take the U.K. government model into other countries, particularly Europe," although progress had been slower than expected. G4S is also seeking a licence to make acquisitions in China, Mr. Buckles said. In Brazil, where the company has decided not to bid for security contracts for the 2014 football World Cup and 2016 Olympics, G4S is still expecting annual growth in security sales of 10 to 15 per cent in the next five years, as well as further acquisitions.

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"The Olympics and World Cup were additional business that we hoped to get," Mr. Buckles said. "The main benefit of prestige contracts such as these are to enhance the company's reputation, not to make money."

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