It is the night before Capita’s profit warning and announcement of an emergency fundraising. Chief executive Jon Lewis is visited in a dream by a rival who has seen it all before: Rupert Soames, of fellow outsourcer Serco. Kate Burgess and Matthew Vincent imagine the encounter.
JL: Rupert, is that you?
RS: Yes, how may I help, old chap?
JL: Well, you could put some pyjamas on for a start.
RS: I never do on Serco’s sleeper train to Scotland, as I foolishly told the FT.
RS: Hmm. That does sound like us.
JL: Except we’re white-collar and you’re blue-collar. Or you would be if you were wearing anything.
RS: So tell me, how bad is it? Worse than it was for Serco in 2014? We were on the verge of breaching our banking covenants, couldn’t pay a dividend.
JL: I wish I could tell you how bad it really is. But you’re the competition.
RS: Bah. Capita isn’t in our league. My grandfather’s darkest hour was in 1940. Serco’s was 2014. Capita’s is probably now. Anyway, I can see a fair amount from here: leverage about three times earnings before the nasty stuff. Is that average debt or end-of-year debt? Easy to dress up a year-end number.
JL: All the numbers are terrible! Year-end net debt was only 2.25 times but cash outflows are so bad and profits falling so short that it could be back to 3.5 times. There are just so many payments, £215m for known commitments, £130m here, another £130m there . . . I just . . . I can’t . . .
RS: Calm down, dear boy. With Capita, you just have to ask “where’s the ’ell”?
RS: What you need is Capital. But you’re missing the ‘l’.
JL: Tell me about it: the pension deficit has gone from £188m to £381m in two years and we must start investing in technology and robotics or we’re finished. But we’re about as popular in the City as one of our parking wardens — and even they’re virtual nowadays. Our market cap’s down from £6.9bn highs in 2014 to £1.3bn now.
RS: Well, my advice is to buy time and bring in capital. Scrap the dividend, which will save you £200m, and do a rights issue. I raised £550m for Serco.
JL: But I need at least £700m. Possibly more. I just don’t know yet.
RS: Then announce it — but delay it, like I did.
JL: Delay it? Why? That is high-risk.
RS: I told you: to buy yourself time. People don’t worry about cash running out — as they did at Carillion — if they know there’s some coming in from shareholders. It gives one breathing space. Rather like my specially tailored Serco shirt.
JL: Which you’re not wearing.
RS: No, but it is embroidered with the slogan ‘Serco — and proud of it’. You could get one that says ‘Capita(l) — and short of it’. As, indeed, are all the hedge funds. Ha ha! But, seriously, a delayed rights issue also gives your shareholders time to save up. Neil Woodford’s one of your biggest isn’t he?
JL: Yes, and he might need a bit of time for his funds to start performing.
RS: In the meantime, you just do like grandpa said: “Keep calm and KBO.”
RS: Keep buggering on. Or appearing to. Tell the government you’re keen for the work while pitching bids that will lose contracts you don’t want.
JL: Clever. We could sell non-core assets, too. Like ParkingEye, which was worth £57m when we bought it.
RS: Yes, but the difference, my boy, is timing. At Serco, I was the first to do all of this. You’ll be last. Look at Carillion: it had to sell its highest-margin business at a knock down price to an opportunistic buyer. Me.
JL: But we’re not collapsing. I can get a good price.
RS: Oh yes, of course, you’re John Lewis — “never knowingly undersold”!
JL: I’m not that John Lewis. I’m Jon Lewis — the guy who sold Amec Foster Wheeler.
RS: Ah. So you’re short of an ‘h’, just as your company is short of an ‘l’. Shame. I was going to ask you to recommend some pyjamas.
TalkTalk is not cheap
If talk is cheap then, mathematically, TalkTalk is more expensive, writes Matthew Vincent. And this seems to be the realisation that investors in the telecoms group have just come to.
TalkTalk’s shares fell 9 per cent on Wednesday after Exane BNP Paribas analysts suggested it could no longer attract broadband customers seeking the cheapest deal. Historically, TalkTalk has operated at the discount end of the market, but is now being undercut by rivals. That, the analysts said, would mean lower subscriber numbers and earnings — and a possible 50 per cent cut to the dividend.
And the problem is that the talk is becoming a chatter. Jefferies and Citi have also said a risk of breaching debt covenants could force a dividend re-think. Given the level of TalkTalk’s distributable reserves compared with its dividend commitments, it may need to do some talking of its own at next week’s quarterly update.
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