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Capita Woes Raise Alarm Bells in Wake of Carillion Collapse

Updated on
  • Stock slumps 46%, two weeks after rival entered liquidation
  • Co. to raise as much as 700 million pounds, halts dividend

Capita Plc slumped the most on record after saying it would halt dividend payouts and sell shares to raise capital, triggering further concerns over the state of Britain’s outsourcing sector just two weeks after Carillion Plc collapsed.

London-based Capita, whose customers include the U.K. government as well as firms like Telefonica S.A.’s O2 and retailer Marks & Spencer Group Plc, will seek to raise as much as 700 million pounds ($993.8 million) and plans to sell some non-core assets. The stock fell as much as 46 percent.

“Significant change is required for Capita’s next stage of development,” Chief Executive Jon Lewis, who started in the role on December 1, said in a statement. “Capita is too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility.”

The U.K. government is monitoring Capita’s financial health but does not think it is comparable to Carillion, a spokesman said by email. Carillion’s collapse on January 15 left behind debts of 1.6 billion pounds.

Capita has contracts with the U.K. Department for Work and Pensions, manages Transport for London’s WiFi network and is also responsible for collecting BBC license fees. On a call with analysts, Lewis declined to confirm if the company had government contracts worth 600 million pounds.

Still in the game

Labour MP and Shadow Cabinet Office minister Jon Trickett urged the government to take steps to oversee Capita’s activities. “We cannot afford another Carillion,” he said on Twitter. “It will be the taxpayer that pays the price for their dogma.”

However, analysts said taking these “painful decisions” now may help prevent the company from becoming the next Carillion. Some investors will view the update as “reminiscent of Carillion as both companies have government contracts,” CMC Markets analyst David Madden said, but while Carillion collapsed, Capita is “still in the game.”

Read: Carillion’s Collapse Hands May Headache on Outsourcing Model

Capita shares were trading down 45 percent at 4:05 p.m. in London. G4S, Interserve, Mitie and Serco also slipped.

Biggest Loser

Capita's plunge follows a decline in outsourcer stocks after Carillion collapsed

Source: Bloomberg

Jefferies analyst Kean Marden said in a note that the “kitchen sink” plan echoes similar steps by other outsourcing firms Serco Group Plc and Mitie Group Plc, as well as energy company Amec Foster Wheeler Plc where Lewis worked previously. Consensus earnings per share estimates, once analysts have included rights issue and bonus factor adjustments, could fall by about 40 percent, Marden said.

Capita has warned of reduced spending by corporate clients several times since the U.K. voted to leave the European Union in 2016. It said Wednesday that it now expects adjusted pretax profit for 2018, before significant new contracts and restructuring costs, to be between 270 million and 300 million pounds. It had adjusted pretax profit of 475.3 million pounds in 2016, and is due to report 2017 numbers on March 1.

Lewis dismissed similarities between the firm and other outsourcers on a call with analysts. “We should not be compared to the ‘G4Ss and Interserves’ of the world,” he said. “We are not a blue collar firm, we are a tech-enabled digitally focused company.”

Sins of the Past

“We are taking very positive steps to address sins of the past,” Lewis said, “which is better than kicking the can down the road and hoping that the markets are just going to turn around.”

The company has identified a small number of businesses that are considered non-core, including its car park management solutions unit, ParkingEye, and its construction sector database, Constructionline. A disposal program for these assets will commence shortly, it said. With the steps announced today, Capita expects net debt at at the 2017 year-end in the region of 1.15 billion pounds.

Capita’s plan to focus on a smaller number of better positioned businesses, with a strengthened balance sheet, allowing appropriate levels of investment, “are welcome steps in the right direction,” Peel Hunt analyst Christopher Bamberry wrote in a note.

— With assistance by Sam Unsted, and Tom Beardsworth

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