Big trouble at Capita

Outsourcing company Capita isn’t another Carillion, but it is in a mess. The new boss will have to get his skates on. Alice Gråhns reports.

You wait all year for a crisis, then two turn up at once

This content is subject to copyright.

The outsourcing company isn't another Carillion, but it is in a mess. The new boss will have to get his skates on. Alice Grhns reports.

The "once mighty UK support-services sector has become a laughing stock and a political nightmare", says Lionel Laurent on Bloomberg Gadfly. Following several profit warnings and the collapse of Carillion, you will be tempted to dismiss Capita whose share price has fallen 80% since 2016 as just another troubled outsourcer. But its newly appointed chief executive Jonathan Lewis would rather you didn't. Unlike "blue-collar" companies such as Serco, G4S or Mitie, which provide security, cleaning and maintenance services or run prisons, Capita is a "tech-enabled, digitally focused company", Lewis insists (among other things, the firm runs London's congestion charge system, pictured right).

Advertisement - Article continues below

But "however you care to describe it, Capita is in trouble", says Laurent. It is too indebted relative to its earnings power, with total borrowings twice their 2011 level. Neither is it generating enough cash. So "Lewis has wisely announced a kitchen-sinking'", combining a profit warning, the suspension of the dividend, asset sales and a rights issue. The news caused Capita's shares to plunge by more than 40% last week, wiping £1bn off its market value.

Advertisement - Article continues below

At least Capita is "not wasting a good crisis", says Aimee Donnellan on Breakingviews. Lewis is "doing the right thing". A £700m rights issue, asset sales and a scrapped 2018 dividend "should plug balance-sheet holes". The £1.4bn firm says these measures should halve net debt. The outsourcer is also starting to address its £381m pension deficit, which is the subject of the Pension Regulator's triennial review.

However, the firm's problems "look broader", adds Donnellan. As with Carillion, Capita "grew at breakneck pace in recent years by acquiring a varied selection of outsourcers, each with their own budgets and forecasts". With no centralised system, its units set their own targets. The upshot, says Lex in the Financial Times, was heavy spending and "a surge in indebtedness".

Advertisement - Article continues below

It's a mess, says Nils Pratley in The Guardian, but "there's no need for the government to panic". This isn't a repeat of the Carillion fiasco: "its financial distress [is] different". The construction company "was scrambling for bank loans, as opposed to permanent equity". Still, people are starting to ask awkward questions, such as how severe Capita's underinvestment in IT and software might be, and how much money it could take to rectify the problem. Is £700m enough to address the issues Lewis has identified so far? How much does the disposal programme need to raise? Lewis "needs to get his skates on" if he's going to sort this out.

Stakes raised in bidding war for chip giant

"Broadcom just made it harder though not impossible for Qualcomm to say no," says Dan Gallagher in The Wall Street Journal. On Monday the semiconductor giant boosted its recent hostile bid for rival chipmaker Qualcomm by 17% to $82 a share a total of $121bn. It sweetened its supposedly "best and final" offer by throwing in an extra $12 ofits own shares, keeping the cash portion of the offer at $60 a share. A tie-up between the two companies would produce the world's number-three semiconductor manufacturer by sales.

Advertisement - Article continues below
Advertisement - Article continues below

Qualcomm says it will think about it, having formally turned down Broadcom's first offer. "The calculus for Qualcomm's board will be more complicated this time." Firstly, the price is better and higher than Qualcomm's shares have fetched since 2000. Broadcom has also added new provisions, including a termination fee if the deal fails to clear regulatory hurdles, and a "ticking fee" that increases the cash portion of the offer if the deal does not close within a year.

Meanwhile, Qualcomm "is short on options for growth", says John Foley on Breakingviews, which is why it has bid for smaller rival NXP Semiconductors. Its operating profitability is declining. Yet "the way out offered by Broadcom is laden with caveats". Antitrust approval is uncertain and "sweetening the offer doesn't help with that". Still, "undoubtedly there are more goodies Qualcomm could extract", says Lex in the Financial Times. "There is no downside to engaging with [Broadcom] to find out." The term "best and final" is "just a starting point".

City talk

Exciting times for Paul Pindar. "First the man who pretty much built Capita over 26 years had to watch the shares halve," says Alistair Osborne in The Times. Then he ended the week seeing Anthony Codling of analyst Jefferies take 15% off the share price of Purplebricks, a firm he now chairs. Codling is questioning how many of the houses on its books the estate agent actually sells. Purplebricks has said 88%. But Codling went through Land Registry records and decided it was 51.6%. He also questioned whether Purplebricks may have "overstated revenue... and understated deferred income liabilities".

Advertisement - Article continues below

"Stagecoach got its numbers wrong. It overbid and it is now paying the price," according to the transport secretary, Chris Grayling, announcing that the East Coast mainline could once again be taken into public hands. "Grayling's first two statements are correct," says Nils Pratley in The Guardian. Stagecoach "plainly took leave of its senses" in agreeing to pay £3.3bn to run the London-to-Edinburgh line for eight years. It couldn't even keep the financial wheels turning for three. But does a £200m forfeit count as paying the price? Given the contract's size, the sum "looks modest".

It is almost eight years since BP was hit by the Deepwater Horizon rig disaster, and its former CEO Tony Hayward told reporters "I'd like my life back". And he got it, becoming chairman of Glencore and Genel Energy, "which he left last June presumably to get his life back again", says Matthew Vincent in the Financial Times. Meanwhile, BP is "only just getting use of its cash flow back after all these years". It says that costs relating to the disaster are coming down: $5.2bn in 2017, compared with $6.9bn the year before.




The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Most Popular


These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020
EU Economy

Why a stronger euro is good news for investors

The fragile state of the eurozone has for a long time brought the threat of deflation. But the ECB’s latest moves have dampened those fears. John Step…
5 Jun 2020