Capita profit warning shows outsourcing's woes aren't over

New boss Jonathan Lewis says the support services company is spread too thin, requiring 'significant' change. Uh-oh.

Last Updated: 31 Jan 2018

Shock profit warnings have become a disturbing fashion in the support services world. Less than a month after Carillion collapsed under the weight of its own debt – heralded by a succession of surprise trading statements during the latter half of last year – rival Capita has shaken the market with its own bad news bomb.

New boss Jonathan Lewis has suspended Capita’s dividend and announced plans for a rights issue in an attempt to fix the company’s troublesome balance sheet, sending shares down 40%. He also made a disturbing assessment of the company’s underlying health.

‘We are now too widely spread across multiple markets and services, making it more challenging to maintain a competitive advantage in every business,’ Lewis said. ‘Capita has underinvested in the business and there has been too much emphasis on acquisitions to drive growth... today, Capita is too complex, it is driven by a short-term focus and lacks operational discipline and financial flexibility.’

It’s a common tale among the support services businesses, many of which underwent rapid, debt-fuelled expansion during the good times, only to find themselves shackled by underperforming long-term contracts over the last few years, and unable to reduce their leverage.

Interserve, for instance, has experienced a worryingly similar sequence of events to the fallen Carillion, with dramatic profit warnings and simmering concern that it won’t be able to meet its banking covenants.

At Capita, Lewis’s solution is a potent concoction of cost-savings, targeted investment and the disposal of non-core operations. Some, such as ParkingEye and Constructionline, will be sold shortly to help pay off some of the company’s estimated £1.15bn net debt, which the company intends to reduce to between one and two times EBITDA. Other disposals will be more strategic.

That sounds like a substantial transformation plan, except Capita was already in the midst of a turnaround plan initiated for former CEO Andy Parker, one which clearly hasn’t worked. The gist was much the same: cut costs and sell off non-core assets – including Capita Asset Services, disposed for £888m last year – in order to strengthen the balance sheet and return to profitable growth.

The big difference is that Lewis has bitten the dividend bullet, something that’s much easier for a new leader to do, especially given what just happened to Carillion. Only a quick glance at the share prices of major support service companies in recent times would surely be enough to convince shareholders that something needs to be done.

Image credit: Capita


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