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Like a runner tripping near the finish line, G4S (LSE:GFS) share price stumbled today on the news that it would not be able to meet its contractual commitment to supply 13,700 security guards for the London Olympic Games. The share price had dropped 7.30 pence to 283.10 by early afternoon as G4S made the headlines in most major newspapers and was the subject of a row in the halls of the British government.
The Contract
The London 2012 games have been in the planning for seven years. In March 2011 G4S was awarded the £284 million security contract that includes supply a contingent of nearly 14,000 persons to staff multiple competition and non-competition venues. The total combined security force was scheduled to be 23,700, and was to be a combination of military, professional security and at least 3,000 unpaid volunteers.
The Irony of Recruitment
Although G4S recently beat out other nominees Hertz and Unilever to win recognition as the Best Global/International Recruitment Strategy, it has been unable to recruit the 13,700 personnel required to staff the London Games. In May a representative of the company said that they had received 100,000 applications, and 80,000 had been interviewed for the 10,000 available jobs not being filled by fulltime G4S employees. Yesterday a G4S spokesperson admitted that the company had encountered problems with its workforce.
Last week, during a training exercise, G4S was unable to supply half of the 750 employees required to protect the stadium and aquatic park security checkpoints. Although exact numbers are not known, it is known that G4S has experienced an exceptionally high dropout rate as new hires have compared the wages to the working conditions and found them not to balance on their scales.
The Repercussions
The Home Office is now under fire for not knowing about the G4S shortfall far in advance of yesterday. Yesterday the government called in an additional 3,500 military troops to fill the gap. That brings the total complement of British military personnel working the games to 17,000, nearly one fifth of the entire army. Home Secretary, Theresa May stood in rebuttal today to comments from the Labour Party describing the news as “another Home Office shambles” and “a fiasco.” Ms. May’s defence was that “It is not a shambles when the government takes the action necessary.” She also countered that the G4S contract is with Locog, but that didn’t wash well against the bottom line that it is her office that is responsible to “deliver a safe and secure Games.”
For G4S, the first repercussion is the public embarrassment it will sustain. Already Keith Vaz, chairman of the Commons Home Affairs Committee, has said, “G4S has let down the country,” and called for a cessation to awarding any further government contracts to G4S. Secondly, the concern is the impact on the G4S stock. The tremor felt this morning, could be a precursor of more to come. Then there is the damage to G4S’s reputation, especially if security problems are encountered during the Games. That could very well damage investor confidence for some time to come. Finally, there is the financial penalties that surely will be meted out to G4S by Locog for failure to fulfill the contract as stated. While it is not certain what the degree of assessment will be, it typically would be expected to be a percentage similar to the percentage of delivery failure. This would adversely affect projected company earnings and, therefore, also investor confidence.
Company Spotlight
With over 657,000 employees, G4S is the third largest private sector employer in the world. Its market cap of £4,089.39 million places it in the elite FTSE 100 companies on the London Stock Exchange. G4S is the world’s leading provider of security solutions for buildings, materials, infrastructure, valuables, and people in both the government and the private sectors. The company has facilities and operations in more than 125 countries, ensuring the security of utility companies, transportation and logistics companies, sea and airports, mining operations, financial institutions, and major events.
