April 23, 2018 / 6:45 AM / 7 months ago

UPDATE 3-UK's Capita raises cash as aims to put problems in past

* New CEO to prune business before return to growth

* Will raise 700 mln pounds for restructuring and balance sheet

* Aims for 300 mln pounds in disposals this year (Adds analyst reaction)

By Elisabeth O’Leary and Paul Sandle

LONDON, April 23 (Reuters) - Capita is raising 700 million pounds ($980 million) from investors to stop the rot at an outsourcing company that Chief Executive Jon Lewis said had failed to adequately control costs, had grown unwieldy through acquisitions and had too much debt.

The cash should give the British company breathing space in a tough market, which saw Carillion collapse under the weight of poorly performing contracts and debt in January.

Capita, like Carillion, is one of a number of British service companies to have run into problems by chasing contracts on slim margins.

Lewis, who took over in December after working for oil services company Amec Foster Wheeler, said many of Capita’s problems were self-inflicted, and could be tackled by doing “fewer things better”.

“Capita needs an injection of discipline,” he told analysts.

He launched his new strategy after Capita’s full-year pretax loss ballooned to 513.1 million pounds, from a 89.8 million pounds loss in 2016, as it saw a deterioration in new business opportunities and some contracts were terminated.

The group, which employs 70,000 staff primarily in Britain where it focuses on providing IT services, ran into problems on contracts following years of acquisition-led growth.

Capita, which runs the London congestion charge and collects BBC licence fee payments, has issued a series of profit warnings which have lopped off two thirds of its around 1.0 billion pound market value in the last year.

Lewis said he had lined up 300 million pounds of disposals for this year, and more in the following two years, before it returns to revenue growth from 2020.

Rationalising costs after years of acquisitions and a short term approach to cost management will deliver an initial 175 million pounds in annual cost savings by 2020.

Shares in Capita were trading up 11 percent at 177.3 pence at 1150 GMT.

INVESTOR BACKING

RBC Capital Markets analyst Andrew Gibb said there was some relief that the rights issue was underwritten and trading was no worse than feared.

“However, a very complicated and costly transformation plan needs to be executed in market conditions that will remain tough,” he said.

Lewis said he needed help to deliver his plan, which was why Capita was asking its shareholders to support the rights issue that would underpin the transformation.

The three-for-two issue, announced three days ahead of expectations on Monday, will raise 662 million pounds in net proceeds, partly to pay off about 1.0 billion in net debt. It already has the backing of two of its key investors — Woodford, with a 10 percent stake, and Invesco, with a 9 percent stake.

New shares will be offered at 70 pence, a 34 percent discount to the theoretical ex-rights price of 105.9 pence calculated in reference to the closing price on Friday.

Lewis aims to simplify and unify an unwieldy structure in which more than 250 different business units have operated separately.

He said his reshaped Capita will focus on five divisions: software, HR, customer management, government and IT services - the areas where long-term profitable growth is available in the outsourcing sector.

He is targeting a “double digit” earnings before interest, tax and amortisation margin within three years, and at least 200 million pounds in free cashflow in 2020.

Capita kept its forecast for underlying pretax profits, before significant new contracts and restructuring costs unchanged at 270-300 million pounds for 2018.

“It’s the end of a difficult chapter but there is a well-defined plan and it’s about executing on that plan,” Lewis told Reuters. ($1 = 0.7135 pounds)

Reporting by Elisabeth O'Leary Editing by Paul Sandle/Keith Weir

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