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Capita Goes for Accelerated Growth with Xchanging Bid | Sherpas in Blue Shirts

October 16, 2015

This week we heard that Capita and Xchanging had agreed on the terms of a recommended cash offer of 160 pence per share. The offer values Xchanging at approximately £412m. If it goes ahead, the acquisition would be Capita’s largest ever; it is 260% bigger than its previous largest acquisition, that of avocis for £157m in February 2015.

Capita’s newly found appetite for larger acquisitions marks a noticeable change in approach between the current CEO, Andy Parker, and his predecessor, Paul Pindar. While Pindar went for niche acquisitions, Parker is going for accelerated inorganic growth.

If this bid goes through, it will impact Capita’s business in the following ways:

Significant leg-up in Insurance BPO: Xchanging is something of a jewel in the insurance sector due to its golden relationship with Lloyds of London as well as insurance sector specific technologies such as Xuber. Insurance services accounts for the larger part of revenue at circa 60%. For some time now Capita has been talking about growth in the insurance sector, setting the scene for more of its M&A activity. It has previously stated, “Where premium growth remains modest, (insurance) firms are focused on improving operational efficiency and organisational flexibility, areas Capita is well placed to help them address.” Before it made the offer for Xchanging, Capita had expanded its insurance capabilities through the acquisition of SouthWestern. This brought it 700 skilled, multi-lingual FTEs at two sites, Krakow and Lodz, providing services to insurance, finance and legal administration, and customer management across Northern Europe. Another relevant and recent acquisition was that of tricontes in 2014. The £6.2m acquisition of the Munich-based company in June 2014 brought Capita specialist contact centre services for various sectors including the insurance sector in Germany.
Bigger play in the private sector business: The split between Capita’s public and private sector business has always stayed roughly around 50:50 with annual variations of plus or minus 5%. In 2014 Capita’s private sector business was £2273.6 and accounted for 52% of revenues. With revenues of £406.8m in 2014, Xchanging could boost Capita’s private sector business by as much as 18% – a significant growth.
Entry into potentially lucrative BPO segments: Xchanging has good capabilities in the fast growing Procurement Outsourcing (PO) and Capital Markets BPO. Our analysis shows that both market segments are growing upwards of 10% CAGR. Further, these are specialized BPO segments and hence less prone to commoditization. However, to fully capitalize on the potential, Capita would have to address recent issues with Xchanging’s PO business.
Geographic diversification: This acquisition would help Capita expand its market presence beyond the UK. Some of the key countries where it could help Capita are Italy, Germany, and the U.S. While the scale may not be big, it can provide Capita a base upon which to build its international business. Further, continental Europe is a specialized market, which may not be the easiest to penetrate for an external service provider. Xchanging, with its multiple contracts in Germany, can help Capita in its entry in that geography.
Greater global sourcing leverage: Capita has around 5,000-6,000 FTEs in offshore location. This acquisition offers the potential of increasing this number by 20-25% primarily in India.

Clearly, this acquisition can help accelerate Capita’ growth and capabilities in multiple ways. However, as with any acquisition, successful integration will be key to harness the potential including effectively addressing recent issues.

Capita is not the only service provider to be eying growth in the insurance sector. With this bid, Capita’s acquisitive culture is set to give it an edge over the others.

For our previous coverage of Capita’s growth strategy see “Capita’s German Gambit.”

Capita’s German Gambit | Sherpas in Blue Shirts

May 19, 2015

Over the years we have seen Capita successfully expand from one market sector to another in the UK and Ireland. Since 1984 when it only served the UK local government sector, it has expanded into seven major verticals and over 15 segments of those. The latest expansion plans take it beyond the UK and Ireland borders into DACH, with Germany being a primary target market.

Acquisitions

Capita’s new geographic growth strategy has seen it make three acquisitions in the DACH region (Germany, Switzerland and Austria) in the past year:

tricontes – the £6.2m acquisition of this Munich-based company in June 2014 brought Capita specialist contact centre services across the retail, telecommunications, utilities and insurance sectors in Germany
SCHOLAND & BEILING – a customer care consulting company also based in Munich, Germany
avocis – announced in February 2015 and if successfully completed, at £157m, avocis would be one of the bigger Capita acquisitions. It would bring Capita 6,500 employees and a portfolio of customer contact management services contracts in DACH. Although headquartered in Switzerland, Germany is avocis’ biggest market, accounting for 53 percent of revenue. The rest comes from Switzerland.

Capita has a formulaic approach to acquisitions with a budget of £200m to £250m per annum. It considers many potential acquisitions each year, selecting a dozen or more that fit its formula to:

Increase scale
Add new expertise to enhance its propositions
Take it into new markets.

In addition, the acquisitions have to make a Return on Capital Employed (ROCE) of 15 percent post tax return after 12-months integration into the group.

Capita recently also acquired 700 skilled, multi-lingual FTEs in Krakow and Lodz, thanks to its acquisition of SouthWestern in Ireland. It can tap into these centres to further boost its presence in DACH for outsourcing services, including insurance, finance and legal administration, and customer management.

The Drivers for DACH expansion

The key drivers for Capita’s German gambit include:

Small growth in the UK market – we estimate that contact centre outsourcing (CCO) to be growing at circa 5 percent. Capita posted decent growth in this business, but given the overall market conditions, Capita must be looking for an alternative growth trajectory outside its comfort zone
Continental Europe is growing – Everest Group research shows a rise in CCO adoption within Continental Europe. Germany has the largest economy in Europe with an under-penetrated and fragmented market, and only in certain verticals such as utilities, retail and telco. Germany, therefore, presents ample room for sustainable CCO growth for Capita
The DACH region represents a large CCO market with 110m German speakers. Yet there is only small levels of outsourcing. Capita sees good opportunity for a transformational CCO partner in the region
Ability to engage existing UK clients – this also provides Capita with opportunities to extend its existing contracts within UK with firms that have European parents and subsidiaries and vice versa
Access to the in-house contact centre market through SCHOLAND & BEILING’s existing portfolio of enterprise clients, enhancing the breadth of Capita’s footprint in the broader contact centre market.

The three acquisitions add scale to Capita’s existing customer management services in the service-line’s key sectors of retail, telecom and utilities. We expect to see some sharing of resources and skills across country units, driven by multi-country client requirements.

The combination of both customer care outsourcing and consulting services represented by these acquisitions also bodes well for CCO clients, who increasingly look to their service partners for guidance in strategic areas, such as the deployment of multi-channel services, enhanced uses of analytics and stronger vertical industry specificity.

Expansion into German local government is a possibility with avocis that has a number of contracts in the sector. This is Capita’s founding market and Andy Parker, the CEO, has already said that he sees much similarity between the UK and German local government sectors. However, expansion into this sector will be after that of avocis’ bigger private sector market. It is unlikely to target the German local government for the first 12 months after the acquisition.

Challenges

Capita’s biggest challenge is integration of these companies along with all the other acquisitions that it has made recently. In recent years Capita has spent:

£271m on 13 acquisitions in 2013
£310m on 17 acquisitions in 2014
£199m spent on 4 acquisitions to date in 2015

These have been in a diverse set of companies, ranging from software and data for utilities and transport sectors to residential and commercial mortgage administration. The company is also expanding its services portfolio into new verticals such as agriculture and science services.

Managing this expansive empire while building efficiencies into services and workforce management is not going to be easy.

Yet Capita continues to deliver growth year after year. In previous years, it managed to significantly boost its CCO business with the acquisitions of Ventura and Vertex in the UK. In DACH, it has to deal with challenges of a different culture and languages as well as the usual aspects of integrating businesses, so we will be watching this space with interest.

There is no doubt that Capita is a master at business expansion. Service providers that want to expand into new service lines and geographies would do well to follow Capita’s German gambit.

UK Outsourcing Giants Take Diverging Paths | Sherpas in Blue Shirts

November 20, 2014

Last week both Serco and Capita announced their interim results. Not only did the two companies show a widening gap in terms of financial performance, but they also highlighted diverging business strategies.

Firstly, their financial performance in H2 2014 to date was very different:

Operating margin:

Capita has managed to stay on track to achieving at least 8% organic growth, net of attrition, for the full year 2014 (2013: 8%). It also stated that it expects to maintain its operating margin in the range of 12.5% to 13.5% for the foreseeable future
In contrast, Serco announced that the 2% organic growth in H1 2014 has turned into a mid-single digit decline in H2. This has been primarily due to reductions in volume of work in the Australian immigration contract but also due to contract losses and reduced volumes elsewhere. Serco expects to shrink significantly by 2016, with revenue reaching a nadir of £3 billion to £3.5 billion from a forecasted adjusted revenue of £4.8 billion in 2014. It expects to return to growth in 2017
Serco also announced a proposed equity rights issue of up to £550 million in the first quarter of 2015 to strengthen its capital structure
Capita announced that it has secured £1.63 billion of major new deals to date in 2014 (nine months). This is down by £1.27 billion year-on-year (largely accounted for by the signing of the £1.2 billion O2 mega deal in 2013). At £4.1 billion the bid pipeline is also lower on a sequential basis compared with £5.7 billion announced in July 2014. However Capita reports a strong win rate of one in two
Serco reported £900 million of contract awards since the half year to date. It also said that its current pipeline and win rate are considerably weaker than before

Secondly, the strategic directions of the two companies are diverging:

With its strategic review still ongoing, Serco announced that it is going to focus entirely on business to government (B2G) in the areas of justice and immigration, defense, transport, citizen services, and healthcare
In contrast, Capita aims to grow its private sector business and in particular in the customer management services (CMS) arena. Like Serco, it made a number of CMS acquisitions in the past few years including Ventura and parts of Vertex. Another growth target is its burgeoning legal business with the acquisition of Eclipse Legal Systems. It is also expanding its presence beyond its UK stronghold to countries such as Ireland and Germany
Serco will be divesting a number of businesses that are now non-core to its strategy. These include the Environmental and Leisure businesses in the UK, Great Southern Rail business in Australia, and the majority of its private sector BPO business which are mostly CMS businesses delivered by two companies that it acquired in recent years: Intelenet and The Listening Company
Capita has made 13 acquisitions to date in 2014 for £285 million, with more likely as it continues to expand or enhance its capabilities

Interestingly, both companies have also announced changes to their boards:

Alastair Lyons, Serco’s chairman has resigned
Capita’s CFO Gordon Hurst is stepping down following a 27-year stint at the company

Serco’s tale of woe began in 2013 when the British government discovered that it had been overcharged by Serco for offender tagging services to the Ministry of Justice (MoJ). The company is still recovering from the fallout more than a year after the issue first came to light, and having repaid more than £68 million of fees and gone through several reviews and management changes. It is ironic that Serco’s new board has chosen to focus on B2G services only, given that the troubles began in a government contract. That said, front line government services is and has always been at the core of the company’s business.

Serco has suffered from failures of governance and risk management. As it rebuilds itself, it will seek to enhance these significantly. In terms of business strategy, it will target growing opportunities in the government sector, as the pressures from aging populations and rising demand for services pushes governments to outsource more. Serco will seek to differentiate itself with its international approach, as part of which it will give its businesses a portfolio of services to go to market within specific regions of the world, to share experience and expertise.

Capita boasts of robust financial and governance structures and highly selective approach to opportunities that it pursues. Robust governance is highly needed given Capita’s aggressive acquisition strategy that has seen it take over more than a dozen companies a year for many years. Even with robust governance problems can still occur. For example, in its eagerness to win more government clients, in 2012 Capita acquired Applied Language Solutions (ALS), which had been awarded responsibility for courts interpreter services in England and Wales. For a while service delivery was less than smooth leading to the MoJ withholding fees in some instances and bad publicity in the press. Overall though Capita has benefited from many niche and strategic acquisitions that it has fully internalized, and which have largely created value and revenue.

There are lessons to be learnt from the performance of the giants of UK outsourcing. Today, one thing that is common to both is the belief that bid and governance structures have to be robust and maintained at all times.

Capita Expands in Ireland | Sherpas in Blue Shirts

August 15, 2014

Capita has acquired SouthWestern Business Process Services Limited from private equity group Ion Equity, for €35m (£28m). SouthWestern provides customer relationship management, financial shared services, data processing and inspectorate services to private and public sector organizations. It has delivery centers in Ireland, the UK and Poland. Clients include the Department of Agriculture Food and Marine, Bord Gáis, the Department for Environment, Food and Rural Affairs, Bord Bia, Eircom and Failte Ireland.

SouthWestern is expecting revenues of €33.6m and an operating profit of €3.4m for 2014.

This is not the first Capita acquisition in Ireland. In 2011 it invested €33 million to acquire the international financial services business of Allied Irish Bank, AIBIFS. It integrated the acquired business with its own investor and banking services division, which at the time employed 2,000 people in Ireland, the rest of Europe, and India.

Capita already operates in Ireland, including as “servicer” to the National Asset Management Agency (NAMA) and contracts with Prudential International Assurance, St James’s Place International and Ireland’s Department of Communications, and Energy and Natural Resources to manage the delivery of a new postcode system across the country.

In 2013 it opened new offices in Dublin and at the time it had a target of employing circa 800 people in Ireland. That target has grown to 1600 since and SouthWetsern brings circa 1000 FTEs. These are mostly based in two sites at Co Cork, at Clonakilty and Little Island, as well as at smaller sites in Lodz, Poland, Dublin and Milton Keynes in the UK.

SouthWestern enhances Capita’s contact center capabilities. It offers multilingual customer services, supporting in up to 14 languages with 24/7 voice and multichannel services. Its other services, such as financial services administration, debt collection and risk management are a good fit to Capita’s existing but currently largely UK-focused services. SouthWestern also brings Capita a bigger presence in the Irish public sector market, which it will be able to expand fast given its long and successful experience in the UK public sector.

Capita’s plans for SouthWestern are ambitious. It is aiming to more than double SouthWestern’s operating profit to €7m and increase its revenue by 40% to €47m in 2016. An investment in SouthWestern’s IT systems in 2015 is to support this growth. Another factor to take into account is a strong pipeline of opportunities. In its H1 204 results, Capita indicated a pipeline of £5.7bn. These included 27 bids of which 90% relates to new business and 10% to contract renewals.

Both Capita and SouthWestern have delivery centers in Poland (Krakow and Lodz respectively). The Polish centers are likely to be consolidated but any additional capacity would help Capita with its plans for growth in Continental Europe. The move to expand into Europe was signaled by Capita’s acquisition of tricontes, a specialist customer management company based in Munich, Germany, for an undisclosed sum in July 2014.

While Capita has always been very acquisitive, a strategy for expansion beyond UK borders is emerging since the new head, Andy Parker, took over from long-term CEO Paul Pindar, this year. We will be watching this space to provide additional commentary in the future.

Photo credit: Charles Clegg

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