Serco:Engie joint venture awarded UK Defence Infrastructure contracts with an estimated base value of GBP900m and total potential value of GBP3.4bn over an initial term of seven years.
VIVO Defence Services (VIVO), a 50/50 Joint Venture between Serco, the international provider of services to governments, and ENGIE, the leading energy and services company, has been awarded contracts to provide asset and facilities management services for the UK defence built estate by the Defence Infrastructure Organisation (DIO). VIVO has been awarded contracts for two of the four regions being tendered under Lot 3 of the Future Defence Infrastructure Services (FDIS) programme. VIVO will be responsible for providing services in the South West and Central regions of the UK, the largest two regions of the four that were competed, and which represent around two-thirds of the MOD's estimated value of Lot 3 of the Future Defence Infrastructure Services contracts.
The total core contract value to VIVO for the two regions is estimated to be around GBP900m over the initial seven-year period, including indexation. There are a further three one-year extension options. In addition to the core fixed price contract for each region, there will be significant amounts of additional project work, which will be commissioned as required by the DIO and, while the future value of these projects is uncertain, the Ministry of Defence (MOD) estimates that they are likely to be worth a further GBP2.5bn over the initial seven year term. As it is a joint venture, half of VIVO's profit after tax will accrue to Serco.
The services VIVO will deliver will support the UK's defence capability, maintaining the MOD's built estate across more than 200 sites and around 19,000 buildings. The core services include planned and reactive maintenance, as well as mandatory safety checks. The potential additional project work will range from small scale asset replacement and property refurbishments to large construction projects. Following a six-month mobilisation phase, the core work is scheduled to start in February 2022, and we expect the additional project work to ramp up during the course of 2022.
Commenting on the contract award, Rupert Soames Group Chief Executive said: 'We are delighted that VIVO has been awarded these important contracts by the Defence Infrastructure Organisation to maintain nationally important assets and buildings across the MOD's estate, and recognise the confidence and trust the MOD has placed in us and the responsibility that comes with it. Serco has a proud 50-year history of supporting the UK's Armed Forces, with contracts supporting activities at many military bases, including Brize Norton, Fylingdales, Yeovilton and Northolt, as well as supporting the Royal Navy at Portsmouth, Plymouth, Faslane and Kyle of Lochalsh, and the UK Government's Skynet secure satellite communications system. VIVO combines Serco's expertise and understanding of the MOD with ENGIE's deep expertise in facilities management and we look forward to working together to support the UK Armed Forces.'
Current trading and updated guidance
The strong performance we saw at the beginning of the year has continued. All of our four divisions have traded in-line or ahead of their budgets in the first five months of the year. In the UK in particular, volumes on both our Testing and Tracing contracts have continued to be strong and we now think it likely that demand for these services will continue for longer in the second half than we previously anticipated. Accordingly, we are increasing our guidance for Underlying Trading Profit in 2021 by GBP15m, to around GBP200m. The VIVO contract will not have any material impact on our profits in 2021. A full update on trading will be given in our pre-close statement on 30 June.
Notes on accounting treatment of the VIVO joint venture, shareholder loans and dividends
The joint venture will be accounted for in the same way as our other joint ventures, and in accordance with international accounting standards. Revenue will not be recognised in Serco's accounts, while 50% of VIVO's profit after tax will be included in our Underlying Trading Profit; the first contribution to Serco's profits is likely to be in 2022. As it is a joint venture, the value of the contract will not be included in our order book. A cash injection is required from both shareholders to set up the VIVO business. This will be in the form of shareholder loans, of which Serco's share is expected to be around GBP8m across 2022 and 2023. The loan is expected to be repaid by the end of 2024. Dividends will be distributed equally to both shareholders and it is anticipated 100% of the profit after tax earned over the lifetime of the contract will be distributed. The first dividends are expected to be paid around two years after the services begin, when the shareholder loans have been repaid, depending on the pace of mobilisation and the volume of additional work.
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