Memo To The G4S Board: It's Time To Sell The Company

Summary

• The management has failed to deliver for shareholders. Those shareholders will be better off selling to Garda.

The shareholders at the British security firm, G4S plc, have two choices. They can urge their board to negotiate a deal with Garda World Security Corp. which wants to buy the company. Or they can take their chances with the current management team, which has systematically destroyed shareholder value over the past decade.

It doesn’t seem like a tough decision, does it?

Garda, a Canadian company in the same industry, just released a letter in which it offered 190 pence in cash for each share of G4S. According to the letter, that represented an 86 percent premium to the price the stock was trading at back in June when Garda made its first offer. G4S rejected that overture, then rejected a second offer and now has rejected a third, saying all of them undervalued the company.

The smart thing for G4S to do is sit down with Garda, try to push the price higher and then sell out. A sale makes sense for a number of reasons. I’ll mention three here.

G4S is run by the gang that couldn’t shoot straight. G4S manages to get itself into the news quite often. Unfortunately, almost all the news is bad and highlights the company’s ineptitude. Consider just a few episodes:

• In 2012 the company failed to deliver enough security guards for the London Olympics, forcing the military to step in at the last minute. A member of Parliament called the performance a ``humiliating shambles.’’

• In 2019 the British government ended G4S’s contract to run a prison seven years early after the government had to take control of the failing jail. The British acted after the government’s chief inspector of prisons said he was ``astounded’’ at how dramatically conditions at the facility had deteriorated.

• A year-long investigation into G4S’s US operations by USA Today and the Milwaukee Journal found in 2019 that the company hired or retained at least 300 employees with records that included criminal convictions and allegations of violence. The same investigation revealed the company’s guards often lose their guns, some of which turn up in violent crimes.

G4S’s financial performance doesn’t inspire much more confidence. A chart on the company’s own website shows that using today’s stock price, which has been pushed up by the takeover bid announcement, total annualized shareholder returns are negative for the past, 1, 3, 5 and 7 years. For 10 years they are ever so slightly positive. To put it bluntly, shareholders could have done almost as well over the past decade putting their money in the mattress.

To give the company its due, financial results in the most recent reporting period showed some modest improvement. But ultimately shareholders have to ask themselves this question: Is there a reason to think a management team that has performed so poorly for so long, has what it takes to turn this company around? CEO Ashley Martin Almanza has been on the job since 2013, so he’s had more than enough time to fix the problems.

• The Garda offer is a solid one. At 190 pence, Garda is paying 86 percent more than G4S was selling for in June and 30 percent more than the stock fetched before the latest bid was made public. Garda has already upped its bid twice. Who is to say they won’t be willing to go higher in a friendly negotiation?

Garda, and its private equity backer, BC Partners, clearly are assuming that they can do a better job running the troubled business. Based on their track records, they could be right. Garda was founded 25 years ago by its current CEO, Stephan Cretier, with $25,000 he got from a second mortgage on his house. He built Garda into the world’s largest privately-owned security services firm pursuing what he called a ``Dr. No,’’ strategy. ``It’s not just about winning market share,’’ he told the Wall Street Journal. ``It’s about world domination.’’ BC Partners, and a portfolio company, PetSmart, bought Chewy, an online pet supply retailer for $3.3 billion in 2017. Its current market cap: more than $20 billion.

Those accomplishments suggest the would-be acquirers can afford to pay a good price for G4S and still find a way to make money down the road. Shareholders of G4S can win now by getting out of a poor investment and recouping some of their losses. Keep in mind that in April shares sold for 70 pence.

• The Garda offer is a sure thing. In the documents it released in conjunction with its bid, Garda said it had the equity and the debt lined up to make a deal now. The company described its offer as ``definite, certain, in cash and fully financed.’’ That is no small thing. The future is always hard to see but at the moment it is especially murky. What will the global economy look like post-pandemic? Will financial markets remain buoyant as they been or suffer a post-Covid letdown? Finally, will governments, large purchasers of security services, have the resources to keep spending after running up trillions in deficits? The best answer to all the questions is: no one knows. Given that, it makes sense for G4S shareholders to push for a deal now. The Garda offer is a bird in the hand. It is worth grabbing.

In rejecting Garda’s bid, G4S said the following: ``The board believes that the timing of the proposal is highly opportunistic, coming as it does at a time of severe turbulence in global markets.’’

The board had it partly right. This offer does represent an opportunity—a chance for its shareholders to cash out at a good price at a good time. The board should make that happen. If not, then shareholders will have a very simple choice to make.