Capita is left with a mountain to climb, says Jim Armitage

JIM ARMITAGE
Jim Armitage: Some investors will also understandably be angered by today’s rights issue: REUTERS

It’s ironic that Capita’s new chief executive spends his weekends extreme mountain biking. After all, Capita’s been hurtling downhill for years.

The British public care little for the company in the news today for doing the Home Office’s dirty deportation work in the Windrush scandal. But its management have been shockingly careless with the business too.

Successive bosses have created an unmanageable monster of a company, buying literally hundreds of businesses with barely any thought of why they were a good fit. Like WPP under Sir Martin Sorrell, Capita took over companies because it could, not because it should.

That has left it straying way beyond its original core strength of high-end, technologically complex contracts to the kind of bog-standard, low-margin labour outsourcing, where it bids against Serco or G4S.

It now bids for contracts in no fewer than 40 different markets, steering into the territory of Jack of all trades, master of none. Skilled businesses, like customer management services or enterprise software, have been starved of investment. Customers noticed and awarded work to better rivals.

As chief executive Jon Lewis puts it, until now Capita has never had a long-term strategy.

For loyal shareholders, this is galling in the extreme. They have seen the value of their company collapse from £13 a share to 160p in the past three years. An astonishing squandering of Other People’s Money for which previous management teams should be held responsible.

Some investors will also understandably be angered by today’s rights issue. Priced at just 70p, it comes at a 34% discount to the previous stock price and sees banks and brokers pocket fees of £39 million.

However, they should take heart. Under Lewis, possibly for the first time ever, they have the beginnings of a management team that will actually manage.

And with today’s fundraiser, he will have enough money to invest properly in the high-margin bits of this business which are well worth saving.

He will sell £300 million-worth of businesses Capita should never have been in and cut costs by £175 million a year, beginning with such low-hanging fruit as Capita’s 300 separate stationery supply contracts. He’ll boost the company’s denuded cashflow, too.

But, like mountain biking, turnarounds aren’t meant to be smooth.

Capita faces huge constraints in government spending and tough competition from the slicker rivals who’ve been winning contracts at Capita’s expense. Don’t expect Accenture, Atos and Deloitte to roll over and hand Capita the market share they have taken from it.

Lewis has broken his wrist five times crashing his bikes on craggy slopes around the world. Shareholders will hope he steers a less rocky course with them.

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