LONDON (Reuters) - Security group G4S (GFS.L) missed out on contracts to run British prisons on Thursday, paying the price for embarrassing the government by failing to provide enough guards at the London Olympics.
The Ministry of Justice (MoJ) was widely expected to hand the majority of five contracts to manage seven state-run prisons to the private sector, but instead said it would keep three under public sector management after the bids failed to impress.
G4S missed the cut on deals to run six prisons, including Wolds in northern England, a prison which the company has managed since 1992 but which will now return to the public sector in July 2013.
French caterer Sodexo (EXHO.PA), British outsourcer Serco (SRP.L) and a venture between U.S. prisons firm MTC and Britain's Amey - owned by Spanish group Ferrovial (FER.MC) - are in the running for the remaining two contracts to run Northumberland prison and three jails in South Yorkshire.
Coldingley, Durham and Onley prisons will remain under public sector management.
Media reports had suggested that contracts to run the eight prisons would have been worth as much as 2 billion pounds ($3.20 billion) in total. Contracts for the prisons that remain in the bidding could be worth some 1.1 billion pounds.
G4S, which runs six prisons in Britain, expressed disappointment at the announcement. Its shares were down by 5.2 percent at 1328 GMT.
It said it would discuss with the MoJ why it was unsuccessful.
Investors had seen the contracts as a test of the state's appetite to continue working with G4S, whose failure to provide enough security staff at Olympic venues forced an embarrassed government to draft in soldiers to cover the shortfall.
Earlier this week Chief Executive Nick Buckles said he hoped G4S's track record in winning government work - which represents some 13 percent of group revenue - would stand it in good stead for prison work.
"To us, it would suggest that the (G4S) business has incurred some reputational damage with the UK Government following the London Olympic contract failure," Espirito Santo analyst David Brockton said.
Along with G4S - which sparked uproar from unions in March last year when it took over at Birmingham prison and became the first private firm to manage a state-run jail - American prison operator GEO Group (GEO.N) and British support services and construction firm Interserve (IRV.L) also missed out.
The ministry of justice said outsourcing firm Mitie (MTO.L), which had bid for all the contracts in partnership with the Prison Service, had also lost out.
Justice Secretary Chris Grayling said other prisons could be put out to private management on a case-by-case basis.
Faced with crowded prisons, high reoffending rates and austerity cuts the government has considered outsourcing in a bid to improve innovation across prisons, probation and youth services.
Electronic tagging contracts in England that could be worth as much as 1 billion pounds are expected to be awarded in the middle of 2013, while some analysts have said it is possible that another 40 prisons could come to market.
Fourteen prisons are already run privately in Britain - three by Sodexo, six by G4S and five by Serco, with all others in England and Wales managed by the Prison Service. Serco has been running a payment by results pilot at Doncaster, whereby its income is contingent on it reducing reoffending rates.
Serco shares were down 1 percent at 1330, Sodexo shares were up almost 1 percent, while Ferrovial shares were flat.
($1 = 0.6255 British pounds)
(Editing by Jon Boyle and David Cowell)