Capita Capita: the writing was on the wall, but some didn't see it The spectacular collapse of Carillion failed to break the spell big names hold over the City Shares in Capita hit a 15-year low after its chief executive announced a profit warning on Wednesday. Photograph: Andrew Matthews/PA
Experts have long been flagging up the ailing health of outsourcing firms, which make their money by running services for central and local government as well as private companies that are trying to cut costs.
The recent collapse of Carillion, which had contracts with the government to provide services such as NHS cleaning, school dinners and prison maintenance, has intensified the spotlight on the sector.
Capita shares hit 15-year low after shock profits warning - as it happened Read more
Days after Carillion plunged into liquidation, the government was forced to deny that rival outsourcer Interserve was on the same path to oblivion, after it had been reported that it was on a watchlist of troubled companies.
Serco, one of the largest outsourcing players, has been struggling to regain its financial stability since a 2013 scandal when it overcharged the Home Office for electronic tagging of criminals.
Now Capita has become the latest in the sector to suffer a major setback as its new chief executive, Jon Lewis, “kitchen-sinked” an array of bad news by releasing it all at the same time. Shares in the firm tumbled 47.5% to a 15-year low after Lewis slashed profit forecasts, announced plans to tap the market for £700m of investment and suspended a dividend that was worth more than £200m to shareholders last year.
Capita baffles itself with its own complexity, but it's no Carillion | Nils Pratley Read more
Some industry observers saw the writing on the wall for the outsourcing sector long ago. Tim Wainwright, an expert on outsourcing at global accountancy firm EY, said outsourcers have been squeezed by the need to provide services ever more cheaply, even as their costs have risen.
“The first time a government or company outsources, it’s relatively easy for someone to make savings, to do it more cheaply than that company could do themselves,” he said.
“When the contract comes up for re-tender, you have to bid cheaper than you did the first time you did it, so you get downward pressure on pricing. Meanwhile, you’ve got upward pressure on your cost base from things like the living wage, apprenticeship allowances and the cost of regulation.
“Clients in the private and public sector need to be realistic about the costs of running these contracts. To underbid is dangerous for the person winning the contract and the person taking it. There’s no winner here.”
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Short sellers – City speculators who make money by betting a firm’s share price will fall – have also cashed in on the problems facing outsourcing firms.
Capita hasn’t attracted the volume of short-selling that Carillion did in the 18 months leading up to its demise. But the percentage of Capita shares being sold short has surged since the end of November last year, and reached a peak in mid-January. Several hedge funds have made multimillion pound profits on this week’s share price plunge.
And yet, while a few savvy observers correctly read the runes, others have been completely wrong-footed by the decline in Capita’s fortunes.
Facebook Twitter Pinterest While some hedge funds cashed in on Capita’s slide in share price, many analysts including Neil Woodford, continued to back the company. Photograph: Rex/Shutterstock
Neil Woodford, who is regarded as one of the City’s star fund managers and stock market seer, said less than two weeks ago he was buying shares in Capita because he believed they were undervalued.
Referring to a financial update released by Capita in December, which prompted a 12% slump in its shares, Woodford declared the market’s reaction “very harsh”.
Of 14 City analysts surveyed by Reuters, only two recommended selling Capita shares before Wednesday, with nine advising clients to hold the stock, one suggesting buying more and two rating the shares a “strong buy”.
All of them will have some explaining to do to any clients who piled into Capita stock on the basis of this analysis.
Capita Contingency plans being made for Barnet's contracts with Capita The London borough has contracts with Capita worth almost half a billion pounds Barnet will look at how to handle fallout should Capita, which has issued profit warnings and said it will try to reduce its debts, follow the fate of Carillion. Photograph: Rex/Shutterstock
The London borough dubbed as the “easyCouncil” for its reputation as one of the most extreme local authorities in Britain for outsourcing public services, is to examine how it would handle the fallout should Capita follow the fate of Carillion.
Conservative-run Barnet council, where Capita has contracts worth almost half a billion pounds that run for a decade – including for services such as funerals and food inspections – voted late on Tuesday to look at contingency plans in the event that Capita ran into financial distress.
The decision came less than 24 hours before the firm issued a profits warning and revealed plans to raise about £700m from investors to reduce its debts, but it underlines the concern in local government over the health of private sector firms in the wake of Carillion’s collapse.
Councillor Barry Rawlings, leader of the Labour group in Barnet, said the warning from Capita and its falling share price raised questions over how the council might respond to further troubles. Speaking to the Guardian after the profits warning, he expressed concern that the firm said it would look to exit some areas of business.
“Somewhere like Barnet, where Capita handles all of the back office, enforcement, planning, environmental health, trading standards, estates, payroll and so on. Will that be part of their core services? We might be one of the only places they do some things. If they narrow their scope, what is going to happen to these services?
“Carillion is a warning, not a direct parallel. But there are some similarities, in the profit warning and the way the shares are going,” he said.
The move by Barnet to consider its position underscores growing concerns over the sustainability of mass outsourcing, after decades of government and local councils picking private partners to run public services. The mood appears to be changing, as nationalisation of the railways and other utilities has gained the favour of a majority of voters according to recent polling.
Tony Travers, an expert in local government at the London School of Economics, said “alarm bells will be ringing all over government” following the failure of Carillion.
“If there were any sense of an unravelling of companies that provide services to the public sector, then immediately it reveals to us that the government cannot in the end transfer the risk [of running public services to private firms],” he added.
The extent of the private sector’s reach into once traditionally state-run services extends from cradle to grave – from the building of hospitals by Carillion in cities such as Birmingham and Liverpool, to the running of funeral and cremation services in Barnet by Capita.
Barnet has been seen as a testbed for mass outsourcing in recent years, with the council having handed a vast swathe of the state to Capita since August 2013. Services under its remit as part of two contracts lasting 10 years include caring for people with disabilities, legal services, IT, finance, HR, planning and regeneration, trading standards and licensing, management of council housing, environmental health, procurement, parking, and the highways department.
Councils have started reassessing their options in light of the collapse of Carillion, while other local authorities are also looking into whether to run services directly once more after decades of outsourcing.
Croydon recently terminated its eight-year contract with Carillion to run libraries and said it would take the services back in-house. Bin collections in Blackpool are set to come back under council control, which local bosses have said should also save them money.
Capita Capita: almost £1bn wiped off value of UK government contractor Grim state of outsourcing firm’s financial position emerges two weeks after collapse of Carillion Capita profits warning – as it happened
Capita runs London’s congestion charge scheme. Photograph: Reuters
More than £1bn was wiped off the stock market value of the government contractor Capita on Wednesday, sparking fears of job losses and forcing Downing Street to play down the threat of a collapse echoing the demise of rival Carillion.
Capita, whose major contracts range from collecting the BBC licence fee to electronic tagging of prisoners, saw its share price nearly halve in a day following a grim financial update that reignited concerns over the outsourcing industry and the stability of public services.
The prime minister’s spokesman insisted Capita was not in a similar position to Carillion, whose collapse earlier this month plunged thousands of workers and small businesses into uncertainty.
“Broadly we monitor the financial health of all our strategic suppliers, including Capita, and we are in regular discussions with them regarding their financial position,” said Theresa May’s spokesman. “And [I would like] to emphasise we do not believe that any of our strategic suppliers including Capita are in a comparable position to Carillion.”
Capita’s shares plunged 47.5%, cutting its stock market value by £1.1bn, after new chief executive Jonathan Lewis stunned markets by admitting the company’s finances were in a dire state and announcing drastic measures to repair them.
Lewis, appointed in October last year, downgraded Capita’s profit forecasts and announced plans to raise £700m to shore up its balance sheet. He also axed a dividend that had been worth more than £500m to investors over the past three years.
A cost-cutting programme is expected to result in job losses among Capita’s 67,000 employees, 50,000 of whom are in the UK, while parts of the business will be sold to raise cash.
Within 10 hours of its statement to the City, Capita’s stock market value had fallen to £1.2bn, with a £381m pension deficit and debts predicted to hit £1.15bn by the end of the year.
Lewis said the company, which has grown rapidly through a string of acquisitions, had become “too complex” and admitted the firm was lacking in discipline.
Q&A What is Capita? Show Hide Capita was founded in 1984 when ex-local government officer Rod Aldridge led a management buyout of the business from the Chartered Institute of Public Finance and Accountancy. At the time it had 33 employees. The company joined the stock market in 1991 and became a member of the FTSE 100 in 2006. In the same year Aldridge resigned as executive chairman after it was revealed he had lent the Labour party £1m. He denied suggestions the loan had any influence on the company winning government contracts but said he would step down to avoid any further controversy. He was replaced by Paul Pindar who became one of Britain’s best paid businessmen, earning £2.5m in 2012. He stepped down from the group in 2014 to move into private equity. Capita grew largely through acquisitions, but a series of profit warnings saw it lose its place in the FTSE 100 in March 2017. • Employees: 67,000 (About 50,000 based in the UK) • Revenue (2016): £4.9bn • Pre-tax profit (2016): £475m • Proportion of business in public sector: 47% • Dividend payout (2016): £210m • Net debt (expected at end of 2017): £1.15bn • Pension deficit: £381m • Share price peak: £13.26 July 2015 • Share price now: 196p • Market capitalisation at peak: £8.8bn • Market capitalisation now: £1.3bn
The measures announced by Lewis are likely to be interpreted as pre-emptive action to ensure a profitable future at a challenging time for the outsourcing industry, signalled by Carillion’s collapse. The outsourcing model involves the government farming out public sector work to private companies.
Like Carillion, Capita counts the UK government among its major clients with contracts that include running London’s congestion charge scheme, tagging prisoners, operating a jobseeker’s allowance telephone line and administering the teachers’ pension scheme. It also collects the licence fee for the BBC.
Labour said the government should take steps to oversee the activities of Capita. “The Tories’ privatisation dogma risks lurching our public services from crisis to crisis, threatening jobs, taxpayers’ money and leaving people without the services they need,” said Jon Trickett, the shadow minister for the Cabinet Office.
“The government must end its ideological attachment to private profit in public services and instead start putting the public interest first.”
Frank Field, chair of the work and pensions committee, said it would be looking into Capita. In a statement that referred to the accounting group that signed off Carillion’s figures, KPMG, he said: “Another day, another outsourcing firm with massive debt, a huge pension deficit, a KPMG audit and the big four popping up at every turn in the company’s chequered history.
“Sadly, Capita goes on the growing list of firms we are investigating to see if their conduct has endangered current and future pensioners’ rights.”
Carillion's collapse should make all councils rethink privatisation | Joanne Fry Read more
Some City analysts said Capita still had plenty of time to avoid the fate of Carillion.
David Madden, an analyst at City firm CMC Markets, said the action from Capita was “a red alert” for investors but added that it “could turn itself around”.
“Carillion collapsed but Capita is still in the game,” Madden said.
Frances O’Grady, the general secretary of trade union body the TUC, said the profit warning from Capita was “really worrying” and urged the government to act.
“We can’t afford another Carillion. The TUC is calling for an urgent risk assessment of all large outsourcing firms. It’s essential the government completes this quickly and is prepared to bring services and contracts in-house if they are at risk.”
Lewis said the measures announced on Wednesday were the “first steps in the road to recovery,” predicting his turnaround would take two years.
Q&A What government contracts does Capita hold? Show Hide Runs government helplines for:
• The state pension
• Jobseeker's Allowance
• National Insurance number allocation
• Winter fuel allowance Transport:
• Operates London congestion charge
• Manages wifi services for Transport for London, including free public access on London Underground
• Provides IT infrastructure services for UK air traffic control
• Planning for 10km of cycling routes in Salford NHS/health:
• Provider of blood transfusion systems to some hospitals
• Manages communications between the NHS and its suppliers, vetting firms on data security standards
• Provides online payment systems to some NHS trusts Pensions:
• Runs the teachers’ pensions scheme
• Works on behalf of the pensions regulator on the automatic enrolment of staff into company pension schemes Other:
• Army recruitment
• Electronic tagging of offenders in England and Wales
• Operates the Gas Safe register for the Health and Safety Executive
• Carries out disability workplace assessments
• Operates the BBC licence fee Photograph: Alessia Pierdomenico/X01156
“Today, Capita is too complex,” he said. “It is driven by a short-term focus and lacks operational discipline and financial flexibility. [It] needs to change its approach. Cost savings and non-core disposals alone will not be enough. We have also taken the significant decision to suspend the dividend and seek equity.”
Capita said it was also undertaking a triennial review of its pension scheme and expected its pension deficit to reduce from the £381m level at the last assessment in summer 2017 as a result of increasing contributions.
Its former rival Carillion has faced criticism for continuing to pay dividends and big executive salaries as debts mounted, eventually leading to a collapse of the company earlier this month.
The work and pensions committee on Wednesday wrote to former investors in Carillion and HM Revenue & Customs as part of a wide-ranging inquiry into the company’s collapse.
The committee asked former shareholders, including major financial institutions BlackRock, UBS and Deutsche Bank, for opinions on how the company was run and why they chose to sell shares when they did.
The committees also asked the Federation of Small Business to provide an overview of Carillion’s payments to suppliers and wrote to Santander bank to ask about reports that it stopped payments to some Carillion suppliers without notice in December.
HMRC has been asked about Carillion’s performance in paying tax and the firm’s total outstanding tax liability.
Image copyright Getty Images
Capita shares have plunged almost 50% after the outsourcing firm warned on profits and announced a major shake-up.
New chief executive Jonathan Lewis said the company had become "too complex" and "driven by a short-term focus" and needed to change its approach.
Capita, which issued a series of profit warnings last year, has again cut its profit forecast and revealed plans to raise £700m by issuing new shares.
The move comes after outsourcing rival Carillion collapsed earlier this month.
Capita operates the London congestion charge, runs the government's Jobseekers Allowance helpline and administers the teachers' pension scheme. It also collects the TV licence fee on behalf of the BBC.
Shares ended the day 47% lower at 182.5p, prompting calls from Labour and trade unions for urgent government action to avoid "another Carillion".
A Cabinet Office spokeswoman said as a "strategic supplier" Capita was always monitored by the government.
The firm employs 70,000 people, about 50,000 of whom are in the UK.
According to Tussell, a firm which analyses UK public sector contracts, Capita won 154 government contracts last year.
'Strategic supplier'
Mr Lewis, who took over two months ago, said a review had found the company worked across too many markets and services, meaning it was difficult to "maintain a competitive advantage" in every business.
Capita had relied too much on acquisitions to drive growth and had also seen weakness in new contracts, he added.
The company does have some financial strengths. It can call on £1bn in cash and credit facilities, has a significantly higher profit margin than Carillion did and has been taking steps to reduce its debt burden.
Analysis by Today business presenter Dominic O'Connell
Image copyright PA
If Carillion had made an announcement like this a few years ago - raising money to pay off debt, admitting a slow-down in the market, owning up to both underinvestment and an over-reliance on buying other companies to find growth - then it might still be with us now.
Instead, Capita's new boss, Jonathan Lewis, has decided to take evasive action early.
Chief executives are normally afforded only one chance to hit the reset button in their time at the top, and the smart ones take it early, and hit the button hard.
That is what Mr Lewis has done.
By taking harsh financial medicine now he has probably ensured that the company does not suffer Carillion's fate.
Mr Lewis plans a wide-ranging overhaul including cost cutting, selling unprofitable businesses and cutting the dividend to shareholders.
Annual profits are now expected to be between £270m and £300m - well below analyst expectations of £400m.
In a conference call Mr Lewis said there was "much to be done", but Wednesday's announcements were the "first steps on the road to recovery".
Neil Wilson, senior analyst at ETX, said signs of problems had been building at the firm, including the loss of "a lucrative and profitable contract with the Prudential" in January.
Jon Trickett, Labour's shadow minister for the Cabinet Office, urged the government to "take serious steps" to oversee the activities of Capita, pointing out that it was the third major outsourcing company after Carillion and Interserve to issue a profit warning in the past month.
Capita is audited by KPMG, the same accountancy firm which audited Carillion.
Frank Field, chair of the Work and Pensions Committee, said Capita was "on the growing list of firms we are investigating to see if their conduct has endangered current and future pensioners' rights".
"Another day, another outsourcing firm with massive debt, a huge pension deficit, a KPMG audit and the Big Four popping up at every turn in the company's chequered history," he added.
What does Capita actually do?
Capita offers customer management services, including the operation of call centres, for public and private sector organisations.
Its customers include O2, M&S, John Lewis, local councils, the Army and the Department of Work and Pensions.
The firm's biggest contract is its management of O2's call centres. The 10-year deal was signed in 2013 and is worth £1.2bn.
It is also the UK's leading provider of software to emergency service control rooms and also runs the Ministry of Justice's electronic monitoring services for criminal offenders.
