Home news Capita seeks to learn from Carillion's collapse

Capita seeks to learn from Carillion's collapse

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There are a number of ways at looking at today’s profits warning from Capita and the shock fund raising that has accompanied it.

The first is that this is textbook stuff from an incoming chief executive.
Jon Lewis, who has only been in the job for two months, has seized the opportunity to re-set expectations for the business while the blame can still be pinned on his predecessor, Andy Parker, who stepped down last September, after three and a half years in the job following a string of profits warnings.
No-one will blame Mr Lewis for today’s announcement.
Instead, while the news has cratered the share price, Mr Lewis will earn brownie points with investors for taking tough remedial action to sort out Capita’s problems.
The company has, in the past, taken on more work than it can handle and, accordingly, has become, as the new boss notes, too complex.
The second conclusion, which is difficult to avoid, is that Mr Lewis has observed recent events at Carillion and is now seeking to avoid similar risks.

Video: PM accused of negligence over the collapse of UK’s second largest constructor

Accordingly, with Carillion’s former directors now facing opprobrium from politicians for continuing to pay dividends when the company’s pension deficit was widening, Mr Lewis has decided to axe the pay-out to shareholders.
Cash is king for this company right now and, with net debt likely to be £1.15bn at the final year end and the pension deficit standing at £381m at the end of June last year, Capita is taking steps to conserve it where possible – especially since it expects to report negative cashflow this year and has already committed to paying an extra £21m into the company pension this year on top of its usual contribution.
Yet conserving cash is only going to take the business so far and, accordingly, shareholders will be invited to contribute up to £700m worth of new money.
This is a vast sum of money and especially when compared with the £550m for which Serco, a fellow outsourcer, tapped shareholders in its own emergency fund-raising in March 2015.
More will come from the sale of non-core assets although it is striking that Capita is not adjusting its profit forecasts to account for either the sale proceeds or the earnings it will forego by selling these businesses.

Image: Problems in Carillion’s construction business were largely behind its dire financial troubles
That suggests it is uncertain either about how much it will raise from these sales, or how much income it could have expected from these businesses this year, or both. Over time, it is likely Capita will also seek to rid itself of less profitable contracts.
While no shareholder ever likes having to stump up cash in an emergency rights issue, some investors are likely to praise Mr Lewis for his candour, for quickly identifying a potentially hazardous situation and for getting to grips with it.
However, while there may be some superficial comparisons with Carillion, there are crucial differences too.
Carillion, contrary to the frequent assertions of the Labour Party and the trades unions, was floored not by its outsourcing contracts but by its traditional construction contracts.
Moreover, a far greater proportion of Capita’s work is done for the private sector than was the case for Carillion.
While the contracts most frequently identified with Capita are collecting the BBC licence fee and administering the congestion charge for Transport for London, it actually has – as Mr Lewis notes – a wide array of blue-chip clients, including the likes of John Lewis and the Prudential, while its biggest ever contract was not with a public sector body but with Telefonica, the Spanish owner of the mobile network O2.
That said, Capita does an enormous amount of work for the public sector, with industry analysts noting it has won 109 contracts from local government and 40 from central government in the last year. The figures for Carillion were just eight and six respectively.
So this warning will doubtless lead to more calls for an end of outsourcing to the private sector.

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The irony is that those making those calls are the same people who, for years, have opposed outsourcing on the basis that it leads to taxpayers being ripped off by private sector companies.
Capita’s plight shows that, if anything, it is more likely to be the other way around. It is becoming clear it has taken on too much work in the past on terms that were scarcely profitable and which, in some cases, turned out to be loss-making.

Source: Sky News