The debt pile at Capita is coming down after a mass sell-off. But is it out of the woods?
Capita has been on a mammoth restructuring journey.
After amassing a mountain of debt, the outsourcing giant decided to strip back its operations to two core businesses – Capita Public Service and Capita Experience, which provides customer support services to firms – and has gradually worked through selling off its remaining units.
This year alone it has sold its travel and events businesses Agiito, messaging and alerting service Pageone and its employment screening firm Security Watchdog.
The news this week that it will sell its majority stake in environmental testing and research firm Fera, once fully finished, completes the firm’s disposal programme of its non-core businesses.
“These disposals have enabled us to significantly strengthen the balance sheet and materially reduce our debt,” Jon Lewis, Capita’s chief executive, said announcing the milestone this week.
In its half-year update in August, the company confirmed that debt is coming down, reducing its net best by £165.8m to £544.6m.
But it posted a pre-tax loss of £67.9m in the first half of this year. In the same period in 2022, it reported a £100,000 profit.
This came after a major cyberattack in March as well as a further data breach in May.
Capita’s systems are used to administer pension funds for several large firms, and as many as 90 organisations have reported breaches of personal information held by Capita as a result of these breaches.
Capita has estimated that the costs associated with the cyberattack would reach between £20m and £25m. However, it has not made any financial provision for any or litigation linked to the breaches.
Danni Hewson, head of financial analysis at AJ Bell, told City PM that the attack “did nothing to engender confidence, and first half losses made for pretty grim reading”.
And last week the firm announced plans to cut 900 jobs,
More restructuring at Capita?
In a statement confirming the cuts, Lewis said that the “organisational review” underpinning the cuts will “continue to identify further areas of cost efficiency” and the firm will “pursue these during 2024” – a point emphasised by a Capita spokesperson when City PM approached the firm for comment.
“The restructuring, I suspect, will be an ongoing process for the next two or three years.” Robin Speakman, an analyst at Shore Capital, told City PM
One example, Seakman suggested, was a greater use of artificial intelligence throughout its operations going forward.
The firm said earlier this year that it was “accelerating our use of AI and generative AI technology adoption across a suite of contracts”.
“I think as Capita continues to move forward… you are certainly going to see the greater and greater use of these systems,” he said, which would make its future costs “more static”.
Despite the suggestion that more restructuring is needed, he was optimistic about the firm’s future, adding that it was “now back on the front foot.”
They’ve been firefighting for the last seven years and the flames are now out
Robin Speakman, an analyst at Shore Capital
“They’ve been firefighting for the last seven years and the flames are now out,” he said, although maybe “smoking a bit here and there.”
“The fact that they are moving back to generating cash in a sustainable way should bring asset allocation options through to management in order to manage the business economically,” he said.
“Debt to EBITDA is coming down to a much more manageable, sensible level,” he added.
Some more encouraging news came Capita’s way late last month after it secured a new £239m 10-year government contract to manage the Civil Service Pension Scheme for the Cabinet Office.
It has also secured other big contracts in previous months, including two major government contracts in May worth a total of £565m.
The deals show that the cyberattack hasn’t knocked the government’s trust in the firm and is still happy to hand over huge sums of money to run state services.
In a recent note, Barclays agreed with Speakman that the firm is in a much stronger position.
“Overall Capita remains on an improving trajectory, with clearer signs of operational improvement and encouraging bid momentum,” it said.
‘Some way to go’
But Michael Hewson, chief market analyst at CMC Markets UK, told City PM that Capita wasn’t out of the woods yet.
Given that it’s still struggling to make a profit as well as grow its revenue, there is the risk it might have to tap shareholders for more cash over the next 12 months
Michael Hewson, chief market analyst at CMC Markets UK
“It still has some way to go before we can say with confidence its problems are behind it,” Hewson said.
“Debt has come down, but it remains high and looking at the balance sheet its liabilities outweigh the sum of its cash and receivables by around £1bn. Given that it’s still struggling to make a profit as well as grow its revenue, there is the risk it might have to tap shareholders for more cash over the next 12 months,” he said.
Danni Hewson said that investors will be paying close attention to its trading update on Thursday next week “to see how margins have held up and how the reorganisation has impacted the debt pile.”
Beyond that, it could have to reckon with the possibility of a takeover approach, Speakman suggested.
“It’s an interesting opportunity for another business to come and buy it out,” he said.
He said that potential buyers will likely wait until its full-year results are out before considering such a move, but if it looks like a good deal and “ticks the boxes, I think that it could be in play”.
Regardless of whether Capita is back to full fitness or not, it will soon begin a new chapter under a new chief executive.
Lewis, who has been at the helm since December 2017, will make way for Adolfo Hernandez on 17 January, who leaves his former role at Amazon Web Services, where he was vice president of global telecommunications.
It will be up to him to make sure the company comes out the other side of this restructuring a much stronger company.
Ben Lucas is City PM’s investigations editor. Got thoughts on this story or anything else? Email him at [email protected]