June 25, 2020 / 7:53 AM / 19 days ago

UPDATE 2-Outsourcer Mitie scoops up Interserve facilities business

* Deal to be part funded by 200 mln stg rights issue - CEO

* Sales down just 12% in April, May

* Shares up around 12.5% in morning trade

* Rival Capita shares fall after trading update (Recasts, adds analyst comment, industry context)

By Pushkala Aripaka

June 25 (Reuters) - Mitie Group is to buy rival outsourcing company Interserve’s support services arm for 271 million pounds ($336.74 million) in cash and shares, flexing its financial muscle to scale-up in Britain’s contract-services industry.

The outsourcing business has been through a turbulent few years with the collapse of Carillion in 2018, followed by Interserve, which went into administration in March last year. Now the coronavirus crisis has added to pressures on the sector.

Mitie, which manages and maintains some of London’s best-known landmarks, has secured contracts with the private sector to help to offset some weakness in the public sector and has embarked on cost-cutting.

Chief Executive Officer Phil Bentley said: “The rationale (of the deal) is that we can add their revenue, if you like, to our sausage machine ... if I can push through their contract margins at 10-12% through my sausage machine which is able to be scaled up, more of that profit will drop to the bottom line.”

Liberum analysts said they viewed the facilities management business as “one of the better quality parts of the Interserve portfolio.”

Mitie’s shares were up 12.5% at 90 pence by 0951 GMT on Thursday.

In annual results published along with the deal, Mitie said its operations had proved resilient during the coronavirus lockdown, with sales in April and May down just 12%.

“(The pandemic impact) is not as bad as we might have feared at one point,” Bentley told Reuters, adding that about 37,000 employees, roughly 70% of its total staff, were engaged in working for essential locations such as hospitals, schools and strategic assets in the lockdown.

To help to finance part of the Interserve deal, which will make Mitie around 50% bigger, the company will raise funds through a 200 million pound rights issue.

The shares issued as part of the deal are equal to about 23% of the enlarged Mitie, which also works with the likes of Britain’s NHS, the police and the Bank of England.

Annual underlying operating profit at Mitie beat analysts’ average estimates.

$1 = 0.8048 pounds Reporting by Pushkala Aripaka in Bengaluru, Editing by Sherry Jacob-Phillips/Patrick Graham/Jane Merriman

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