Article by Anrike Visser.

G4S has been subject to an intense takeover bid process in the last few months. It started in October with a hostile takeover bid from GardaWorld of GB£ 3 billion (about US$ 3.9 billion) for G4S, a private security firm, which was later raised to a final bid of GB£ 3.68 billion.

Allied Universal joined the bidding war with its latest offer of GB£ 3.8 billion, to which the G4S management was more susceptible. Within hours, GardaWorld said it was considering raising its bid, and their final bid turned out to not be final after all.

How did this bidding war start? Analysts at RBC Capital told financial news magazine Barrons that Allied Universal’s offer was a “fair price,” and “there is uncertainty given current management’s poor track record of delivery.”

Part of that poor track record is the fact that currently, three former senior managers are facing a fraud lawsuit for overcharging the UK government in a contract for electronic tagging. In July, the company was fined GB£ 44 million for the overcharging. As a result, 100 institutional investors filed a lawsuit against G4S for “turn[ing] a blind eye” to the overcharging. G4S stated in the High Court that investors cherry-picked statements it made to support their claim.

Another ongoing investigation concerns the former CEO of G4S Belgium fixing prices with competitors. The investigation is being conducted by the Belgian Competition Authority (“BCA”) and the US Department of Justice Antitrust Division (“DoJ”), G4S states in its 2020 half-year results.

Not surprisingly, GardaWorld launched its bidding war saying G4S needed fresh management to deal with ‘scandals, crises and lawsuits.’ G4S told Global Ground Media, “G4S has fundamentally refocused and repositioned its business and is today a global leader in security services with an unmatched market footprint and industry-leading capabilities.”

GardaWorld also claims that G4S’s GB£ 2.7 billion pension fund is “underfunded,” but G4S hit back saying that the fund has GB£ 2.4 billion in assets. G4S states that “G4S already has an agreed funding plan with the Trustees.”

The Daily Mail reports that GardaWorld will continue to “throw light on the awful performance of G4S, not just financially but in the real world,” to convince shareholders to accept their bid.

Accrued Debt

To understand the susceptibility of investors to a change in leadership, the bidding war has to be seen in the context of G4S’s financial performance compared to its competitors.

The average profit of the G4S group (G4S), from 2009 to 2018, is around GB£ 132.9m or 1.79 percent of revenue, according to research by the Centre for Research on Multinational Corporations (SOMO). This average profit margin was considerably lower than that of its two main competitors, Securitas (2.9 percent) and Prosegur (4.8 percent).

In 2018, G4S had a larger debt than its competitors with a debt-to-equity ratio of 6.1 compared to 2.7 at Prosegur and 2.5 at Securitas, SOMO reports. Companies with a higher debt-to-equity ratio have a higher chance of not being able to meet their debt repayments than companies with a lower debt-to-equity ratio. The debt-to-equity ratio is calculated by dividing total liabilities by total equity.

Vincent Kiezebrink, Researcher at SOMO, shares his take on the debt at G4S in an interview with Global Ground Media. “In my opinion, G4S is very highly leveraged, indicating that its directors are quite willing to take on risk,” he said, referring to the debt-to-equity ratio of 6.1 in 2018.

G4S does not agree with SOMO’s analysis, stating “they used statutory numbers that are not like for like, i.e. they are not adjusted for [Foreign Exchange], disposals and legacy items.”

Rising Dividend

Partly responsible for the accrued debt of G4S are rising dividend payments. From 2009 to 2018, G4S paid more dividend than its total net income after tax in four out of ten years. During that time, the company increased its total dividend payments from GB£100.5 million to GB£ 150 million.

Table 1. Net income after tax and dividend G4S

(Source: Thomson Reuters Eikon accessed 29-Jul-2019 15:38 by SOMO and shared with Global Ground Media)

G4S spent almost all its profits on dividend payments to shareholders. In low years, the company “must have financed such payments from its reserves or by incurring debt,” SOMO states. G4S has a “progressive” dividend policy reflected in increasing dividend payments over time.

G4S made a loss of GB£ 80 million over 2019 and paused dividend payments because of the financial impact of COVID-19. The company decided to pause dividend payments until “the uncertainty surrounding the pandemic has reduced to an acceptable level.” G4S stated that “[a]s announced on 25th November 2020, the Board intends to resume dividends from 2021 onwards, in line with its existing dividend policy.”

Hostile takeover rival GardaWorld stated that G4S was misrepresenting the reasons for its sustained financial loss. “G4S’s own missteps have driven its share price decline earlier this year, in some instances well before markets reacted to the pandemic.”

Amongst other things, GardaWorld points to the sale of the majority of the Cash Division in February to The Brink’s Company for GB£ 727 million. Before the sale, the entire Cash Division was responsible for 15 percent of revenue in 2018.

GardaWorld added that “shares lost 15% the day after the announcement of the Cash Solutions divestiture in February, 23% on the 2019 results release and 17% on the announcement of the dividend suspension.” GardaWorld estimates that GB£1 billion in shareholder value, or 62 pence per share, was lost through “non-Covid items.”

Bonuses

Another topic of debate among its investors has been the remuneration of G4S’s directors. In 2017, CEO Mr Ashley Almanza earned 403 times the wage of an average G4S employee.

In 2018, the average salary, including the benefits of a G4S employee, was GB£ 9,390, which is lower than the average pay of an employee of Securitas (GB£ 22,931) or Prosegur (GB£ 14,295).

According to SOMO, “this comparison does not take into account differences between countries of operation, hours worked and other factors.” G4S employs half a million people across more than 85 countries.

In 2018 and 2019, both the CEO and the CFO waived their bonuses. According to company reports, the 2018 bonus was not paid because of “challenging market conditions in a number of Cash Solutions markets, which weighed on the overall financial performance of the Group.”

In 2018, Almanza earned GB£2.9 million (down from GB£ 3.7 million in 2017) and the CFO, Mr Tim Weller, earned GB£2 million (up from GB£ 1.6 million in 2017). The management also announced it would decline a bonus and annual salary increase in 2020.

Strategy

The GB£ 80 million loss that G4S experienced in 2019 has to be seen in the light of a transformation from cash payments to digital payments globally. Earnings actually increased to GB£ 263 million from GB£ 261 million in 2018, but the company had to drop GB£205 million of forecasted value from its UK Cash Solutions business “given the rate of decline in cash volumes in the UK market.”

To increase profit going forward, G4S is focusing on technology instead of human security, with a higher profit margin and lower labour costs. The company also considered reducing the cost of human resources by reducing the amount of training it provides to employees. In response, G4S says “the amount of training provided has increased in the US” from 2.1 million hours of training in 2019 to 2.6 million hours in the year to date. The company doesn’t share how many employees it has had in the US in both years.

The training programme in the US can be more than twice as long as those of some of its competitors, according to Almanza during a presentation of the 2018 results for investors on 12th March 2019. In 2018, the company reported that staff costs of GB£ 5.3 billion accounted for 70 percent of the company’s total turnover of GB£ 7.5 billion.

The question is if the declined management bonuses, sale of the struggling Cash Division and strategy to increase profit will be enough to satisfy stakeholders, customers and staff going forward. There is a risk that the financial pressure G4S is under to lower labour costs and provide rising dividend payments, could lead to an erosion of the quality of its services as reported by USA TODAY in March.

Labour Issues

USA TODAY and the Milwaukee Journal Sentinel investigated G4S’ US activities and found a “pattern of questionable hires often driven by low wages, high turnover and pressure to sign new contracts and bring on enough guards to meet requirements.”

The company faced several previous lawsuits and fines related to labour disputes. In 2018, G4S was facing “a number of disputes […] in relation to the application of local labour law, commercial agreements with customers and subcontractors and claims and compliance matters.” According to G4S, labour laws and regulations are “complex” and “open to interpretation” in various countries. The company warned its investors for “further disputes and claims from employees [that] could arise in the future.”

G4S elaborated on this warning to investors by stating, “The Board and Management team inherited a number of longstanding, significant legacy issues,” and “the vast majority of these legacy issues have been successfully resolved.”

In 2019, G4S paid GB£ 87 million to settle a class-action suit of 13,500 US security officers regarding meal and rest breaks. There were also “labour claims” in the US and Brazil of GB£ 14 million and GB£ 32 million for “employee claims” in Asia and the Americas.

In another part of the world, allegations of human rights issues in Qatar and the United Arab Emirates led to the blacklisting of G4S by the Norwegian sovereign wealth fund, the world’s largest sovereign wealth fund.

In 2018, the company also required an additional GB£ 12 million to compensate employees in Asia, and a further GB£ 11 million to settle claims with former employees in the Americas region. In 2017, the company spent another GB£ 9 million on settling labour disputes from earlier years in the Americas region.

Also in 2018, G4S spent GB£ 35 million to equalise pension benefits between men and women, following the UK High Court Ruling on gender discrimination in the Lloyds Banking Group pension scheme.

Recently, G4S employees sent a letter to both G4S and GardaWorld, urging them to secure jobs in the future. According to the Financial Times, “[t]hey said their day-to-day experience showed it was impossible to continue increasing workloads in the hope of achieving higher margins.” Labour costs consist of around 70 percent of expenses at G4S.

Operational Issues

In addition to labour fines, the company also seems to struggle in some instances with delivering contractual targets. From 2010 until March 2020, G4S had to pay fines totalling GB£ 3.3 million to the UK Ministry of Justice for failures to comply with operating procedures. In April 2019, G4S had six custodial services contracts, four youth justice contracts, two electronic monitoring contracts and a facilities contract totalling GB£ 4.7 billion in the UK.

In 2018, the company also booked an additional provision of GB£ 11 million for expected income losses from “onerous contracts.” Onerous contract provision includes “items that are subject to commercial and/or contractual disputes and may be subject to early termination, penalty clauses, or other contractual penalties.” This specific provision of GB£ 11 million was created for “anticipated losses” of contracts with the UK Care & Justice Services and the COMPASS asylum seeker contract.

G4S saw its contract to run HMP Birmingham terminated and brought back to public ownership. Inspectors reported that drug use was barely concealed and “[s]hockingly, staff were too often ambivalent and accepting of such incidents.” In response, G4S stated that they faced “exceptional challenges,” including “high levels of prisoner violence towards staff and fellow prisoners.”

On 6th October, it was announced that G4S will run a mega-prison in the UK, after landing another government contract of GB£ 300 million. G4S states that “[o]ur momentum remains very good with contracts won and retained that to date have an annual value of [GB£] 2.5 billion.”

G4S management advised investors to accept the Allied Universal bid. On 5 January, Allied Universal sent the offer documents detailing the bid to G4S shareholders. If the bid is accepted, Allied Universal is planning to sell the G4S’s prisons contract only two months after the mega-contract being awarded to G4S, leading to requests to the Minister of Justice to intervene.

Tax Claims

Another financial controversy relating to G4S in the UK is its tax payment. In 2013, the UK’s National Audit Office (NAO) noted that G4S had not paid any corporate income tax for the previous year, despite a turnover of GB£ 1.9 billion in the UK.

G4S stated that it did not pay corporate income tax because of exceptional losses incurred in 2013, including a GB£ 70 million loss on the security contract for the 2012 Olympic Games in London. Other reasons cited by NAO were: interest deductions on group borrowings, the availability of statutory tax reliefs for items such as investments in research and development, pension scheme contributions and the utilisation of tax losses. The NAO warned of a “crisis of confidence” in the eyes of the public when private contractors receive government contracts worth billions but pay very little tax or none at all.

In 2016, G4S had to pay an additional GB£ 580,000 tax in the UK between 2007 and 2011 for declaring parking fines as a business expense. The court ruled that parking fines were not “necessary” expenses valid to be deducted.

Over the past years, G4S faced several financial investigations in other countries other than the UK for its tax behaviour. In Estonia, G4S has been accused of using loans to transfer profit from Estonian subsidiaries to the UK between 2007 and 2014. This tactic allegedly helped G4S avoid paying an estimated € 21.5 million in corporate income taxes in Estonia. G4S denied the accusation, saying the loan was a regular intra-company loan at an interest rate of 1.582 percent, which is higher than G4S would have paid on the market at the time.

And in 2016, G4S Australia did not pay any corporate tax in 2016 despite being among the 700 largest companies in the country. The Australian Taxation Office shared at that time that only AU$47,000 out of AU$ 253 million “total income” was listed at “taxable income” at G4S Australia Holdings Pty Limited.

In 2017-18, G4S Australia paid AU$ 2.2 million in taxes over a total income of AU$ 258 million. Taxable income was only AU$ 7.4 million that year.

According to G4S, these issues are in the past. In 2019, G4S paid GB£ 107 million tax globally, up from GB£ 55 million in 2018, according to its 2019 annual report. G4S referred to its effective tax rate as “the best tangible evidence, which demonstrates we are not avoiding our tax obligations” which was 39 percent in 2018. Effective tax rate is tax divided by earnings before tax. In 2019, the company reported a loss of GB£ 80 million after dropping GB£ 205 million of forecasted value from its UK Cash Solutions business, leading to an effective tax rate of 396 percent.

To summarise, G4S had taken on at least twice as much debt as two competitors in 2018, made a loss in 2019 and paused dividend payments in 2020. In addition, there is an ongoing fraud investigation in Belgium after several scandals in the previous years. As the end of the bidding war draws near, investors will surely keep an eye out for the performance of G4S in the years to come, to see if the scandals are indeed a thing of the past.

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Article by Anrike Visser.

This article was developed with the support of the International Women’s Media Foundation.

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