Capita rebuffs private equity approaches
PRIVATE equity firms are circling troubled outsourcing firm Capita after it announced moves to shore up its finances.
Capita last week unveiled £513 million losses and said it needed to raise £701 million from shareholders.
The £1.2 billion firm has since received more than 100 letters from private equity firms in the UK and the US asking to buy parts of the business.
There have been fears Capita – whose contracts include collecting the BBC licence fee and the London Congestion Charge – could suffer the same fate as government outsourcer Carillion which collapsed in January with £1 billion of debt.
But chief executive Jon Lewis, appointed to revitalise Capita last December, has rebuffed the approaches.
‘The businesses are not for sale,’ he said. Lewis has been cheered by investors’ support for his plans. ‘A number of our major shareholders have been buying tranches of millions of shares. People have recognised we are not another Carillion.’
Woodford Investment Management, run by star fund manager Neil Woodford, is Capita’s second-largest shareholder. It admitted it had ‘misjudged’ the firm’s woes but said it ‘will be in better shape by the end of 2018’.
Lewis plans to cut costs by £175 million a year, simplify Capita’s structure and raise another £300 million by selling three businesses this year.
A dozen Capita directors, including Lewis, could share a £71.5 million bonus pot under long-term incentive plans.
OUTSOURCING group Capita has had a hard time in recent years, with a raft of profit warnings, a growing pensions deficit and a Labour leader threatening to nationalise many of the services it provides.
Its woes were compounded at the start of the year when it issued a profit warning just two weeks after the collapse of fellow contractor Carillion. Shares plunged to a 15-year low, wiping £1 billion off the value of the company overnight and it looked as though the troubled business could be the FTSE 250’s next casualty.
But, three months on, Capita is still hanging in there. Shares closed on Friday 17 per cent higher than at the start of the week as cautious investors wondered whether the turnaround was finally starting to take hold.
Capita provides outsourced services to private and public companies, including back office IT projects, call centre operations and administrative duties. Its contracts include collecting the BBC licence fee and London’ s Congestion Charge. Other customers range from Marks & Spencer and O2 to the Army.
But a scattergun approach has created a business with a lack of focus. Last year, chief executive Andy Parker stepped down after a 33 per cent drop in profit and new incumbent Jon Lewis promised change after admitting that the business was ‘ too complex ’, too focused on the short-term and lacking operational discipline. Too many acquisitions and too little investment in IT were cited as just some of the issues facing the business. That much can be seen by looking at its website, where the ‘Our Services’ menu ranges from travel and events to financial services, and from legal services to start-up business development. But Capita is working on this – it has disposed of a specialist recruitment business and its Capita Asset Services division. The plan is to simplify the business, reducing the number of markets it serves from 40 to just five, while increasing its international focus.
If you can get past the headline figures – a net loss of £513 million in 2017 and a £400 million pension deficit, for example – things may not be as grim as they appear.
Underlying operating profits, for example, soared 34 per cent in the year to £447 million, with several divisions making good progress. The business expects pre-tax profits of between £ 270 million and £300 million for this year, though that doesn’t take into account the costs of restructuring and turning the business around.
This week’s gains will be little solace to long-term investors; shares are still down 67 per cent over the past year – from 565½p to 187p.
Yet, while there are definitely problems, you have to wonder whether Capita has been unfairly punished by investors for simply reminding them a bit of Carillion. Certainly, it seems the top dogs are confident.
This week non-executive director Andrew Williams splashed out £53,750 on 30,000 shares while chief executive Jon Lewis snapped up 138,500 for £248,120.
Veteran investor Neil Woodford is remaining steadfast, too, though it is understood that his fund took a £ 40 million hit when Capita suspended its dividend in January.
The star fund manager is Capita’s second-largest shareholder, with a 10 per cent stake in the business. Midas verdict: Investors bruised by the heavy falls in the share price may want to hold on to their stock in the hope of reducing their losses. Newcomers should hold fire for now. Turnarounds are rarely quick and not always successful. While Capita’s management team has i dentified a plan of action, it remains to be seen whether it can pull it off.