De La Rue’s Bid to Return to Circulation

De La Rue’s Bid to Return to Circulation
Finance

De La Rue, the British firm which has printed roughly a third of all banknotes currently in circulation, has recently come to be better known for its long list of scandals. Last year, the company was left red-faced after it was drastically underbid by European competitor Gemalto to produce UK passports; just months ago, the firm came under fire for poor financial management. Soon thereafter, the Serious Fraud Office (SFO) announced an investigation into De La Rue over possible corruption in its South Sudan operation.

Now it seems De La Rue is attempting to stage a comeback, having hired “turnaround expert” Clive Vacher as its new chief executive. Vacher has made salvaging failing businesses the centrepiece of his career, previously revitalising firms including Rolls-Royce and American aerospace group General Dynamics. In the short term, at least, Varcher’s arrival has lifted spirits at the 200-year-old printing company: De La Rue shares rose 1.79 percent by mid-morning on the day of the announcement.

Dark times for De La Rue

De La Rue’s new head replaces former chairman Martin Sutherland, who was ousted following what can only be described as a catastrophic period in the company’s history. Last November, the firm reported that its operating profit had plunged by more than 35 percent from £26.6 million to £17 million; Sutherland sought to reassure investors by claiming the business would “refocus [its] identity business on the supply of higher margin [services].”

By April 2019, however, De La Rue executives were fighting for their jobs after investor Crystal Amber slammed the company’s still-floundering performance as “unacceptable.” The activist fund went on to criticise Sutherland for failing to adopt “specific proposals” for reform in the wake of a dire 2018.

Sutherland’s headache rapidly worsened from there. In June, the firm was forced to write off £18 million in revenue after Venezuela defaulted on its bills, and De La Rue had to axe 170 skilled manufacturing jobs at its Gateshead Plant, sparking the ire of union activists. Then, to round out the summer, De La Rue came under investigation by the SFO. Its operations in South Sudan, it seems, may be tainted with serious fraud, bribery and corruption.

Still, it was the very public, and ultimately disastrous, loss of the £490m contract—De La Rue had proposed a much higher £610m bid— to print the post-Brexit blue passport that was the final blow to Sutherland’s five-year stint as boss. He announced his exit by claiming that the loss of the passport contract, as well as “competitive pressure in the banknote print market,” presented major challenges for his then-unnamed predecessor.

New business sectors to the rescue?

Vacher appears to agree. Essential to the turnaround the new chief executive is hoping to spearhead is the breaking away from the firm’s traditional bread and butter, especially its passports divisions. In June, the company announced the sale of its International Identity Solutions business for more than £40 million.

“De La Rue is starting to feel like an analogue stock in a digital age,” said AJ Bell investment director Russ Mould before the sale, “after all, the company prints bank notes in an increasingly cashless world.”

Under Vacher’s new vision, De La Rue will be split between a currency arm and an authentication arm, the latter dedicated to making security features for products such as ID cards or registered substances like cigarettes. This new business area has already yielded a few successes, as the embattled company has notched contracts to track and trace tobacco and soft drinks in the UK and in Saudi Arabia.

Wrinkles in De La Rue’s venture into track and trace

Even this new scheme, however, is hardly working out without a hitch. De La Rue recently lost a track and trace tender in Pakistan thanks to a too-high bid. Meanwhile, in a bid to fulfil its contract to provide unique identifiers for the UK’s mechanism to track and trace tobacco, for which De La Rue does not have a technological solution, it subcontracted the work to IT giant Atos. Atos was a problematic choice at best, however: the firm has longstanding ties to the tobacco industry.

Having been found complicit in the smuggling of its own products, the tobacco sector has worked at every turn to thwart the track and trace schemes which might cut down on this illicit trade. Despite the WHO specifying in no uncertain terms that the entirety of such systems, from the generation of the unique identifiers to the storage of track and trace data, should be kept out of the hands of the untrustworthy tobacco industry, the major tobacco manufacturers have tried every trick in the book to hijack track and trace for their own ends.

One of their strategies to do so has been the development of an industry-sponsored “solution” for tracing tobacco products, known as Codentify. Despite having been developed by tobacco industry giant Philip Morris International (PMI) and licensed to PMI’s main competitors at no cost, Codentify’s backers have insisted that it’s “fully independent from any tobacco company” since it was transferred to French investment company Inexto for a symbolic amount. Public health bodies, as well as academics, have warned that Codentify is, in fact, deeply linked to the tobacco industry and “not fit for purpose”, but that hasn’t stopped the tobacco companies from aggressively lobbying for its adoption.

Atos both helped develop Codentify and served as an “independent reputable organisation”, in the tobacco industry’s own words, to promote the system—making it a highly problematic choice for De La Rue to subcontract some of its track and trace duties out to.

Nor is its selection of an untrustworthy partner the only problem De La Rue has faced while trying to comply with its track and trace contracts in the UK. Retailers seeking to enrol in the programme have complained about “limited help and delayed response times” from De La Rue. More than two weeks after track and trace went into effect last May, many British store owners said they had yet to receive the codes needed to purchase compliant tobacco stock. To make matters worse, De La Rue may soon be forced to fork over compensation if the UK’s track and trace scheme is abruptly suspended following a no-deal Brexit.

There’s no doubt that Clive Vacher has his work cut out for him if he’s hoping to reverse De La Rue’s sinking fortunes.

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