Carillion will for ever hold the title of most self-deluded outsourcer but Capita, on the account provided by the new chief executive, Jonathan Lewis, deserves a place on the podium.
Two years ago, the share price was £10, the dividend was lifted 9% and the group boasted that its profit margins were about to get fatter. Capita, in short, was presenting itself as an oasis of calm in a sector already under stress. Now the company is issuing 1bn new shares at 70p to raise £701m to ensure it doesn’t go the way of Carillion.
Dividends have been canned for the time being. The latest collection of non-cash write-offs, in the form of goodwill impairment and suchlike, takes the tally to £1.2bn since that last hurrah in 2016. The scale of the reappraisal of a business that was once a respected FTSE 100 outfit is astonishing.
The way Lewis tells it, the disaster for shareholders has been a long time in the making. Capita has “never had a strategy”, he says. Instead, the company is the product of 250 small acquisitions, with the operating businesses never integrated into coherent units. “Everyone was accountable, therefore nobody was,” he argues, in effect damning his predecessors.
The tale has parallels with that of Serco, where crisis struck in 2014, and the underlying causes were not dissimilar. In the go-go years for outsourcing, life was easy. The arrival of stiffer competition and smarter customers (including in government) exposed the horrible truth that these firms, with their overleveraged balance sheets, were built only for bull markets. The crisis at Capita just took longer to be exposed.
Lewis starts with a couple of advantages as he attempts a revival while cutting £175m from costs. First, even in a bad year such as 2018, he expects underlying pre-tax profits to be £270m-£300m. Second, he thinks another £300m can be raised from selling non-core business to further repair the balance sheet and plug the pension deficit. Capita, with its guaranteed £701m (or, rather £662m once the bankers, advisers and hangers-on have had their cut) will survive.
Fine, but the figure that stands out is the £500m earmarked for spending over the next three years on technology and infrastructure to address “historic underinvestment.” It sounds like essential stuff since Capita is skewed towards the back-office processing end of the market. But half a billion quid to become competitive again? It suggests recovery, as at Serco, will be hard and slow work.
Prothena joins unlovely list
The 13% bounce in Capita’s share price was a relief for the under-pressure fund manager Neil Woodford, who was a holder of the stock all the way down. Then came the afternoon news from the US: Prothena, an Irish biotech company that is listed on the Nasdaq exchange and is one of Woodford’s big bets, said its most important development drug failed its crucial clinical trial. Cue a 65% crash in Prothena’s stock price.
Upsets happen in biotech, of course. Woodford, in the jargon, is also a high-conviction investor, so one can’t be too surprised that his funds own 29% of Prothena. But the oddity is that Prothena wasn’t merely 8.56% of his Patient Capital fund, which is big in biotech. Some 2.67% of his main £7bn Equity Income fund was also invested in the stock.
A high-risk biotech firm that doesn’t pay a dividend looks a very odd holding for an income fund. Woodford’s folk point out that he’s always allocated up to a fifth of his income portfolios to non-dividend-payers. Well, OK, but the policy looks more attractive when the sun is shining on the overall portfolio. Unfortunately for Woodfood, the rain hasn’t stopped for a year. Prothena joins an unlovely list that comprises Provident Financial, the AA, Allied Minds and more.
Sky Bet changes the market
Sky Bet, one used to think, was one of those interesting but insignificant businesses that large parent companies sometimes create in idle moments. Then, in 2014, the satellite broadcaster Sky sold 80% of the business to private equity firm CVC in a deal that valued the operation at £800m, which was serious money.
Now, though, Sky Bet is being sold for $4.7bn (£3.4bn) to Stars Group, the Canadian firm behind the PokerStars website. Sky collects a few quid on the way but CVC has made a fortune. Did the broadcaster sell too soon? In retrospect, yes, obviously. It probably underestimated just how rapidly mobile betting, Sky Bet’s specialism, is changing the market.
But, to put the latest valuation in context, £3.4bn is slightly more than the stock market value of grand old William Hill. Back in 2014, almost nobody would have predicted that.
