Just two weeks after Carillion disappeared under a pile of debt and failed contracts, Capita has reignited the issue of outsourcing key government services after it warned on profits and announced a £700m rights issue.
While the government insisted Capita would not be the next Carillion, shareholders were not so sure and at the close of play on London Stock Exchange on Wednesday, shares in the company were down 47.53% at 182.5p.
Restructuring – rights issue
Chief executive, Jonathan Lewis (left) - who only arrived at the helm in December - announced a massive restructuring that will include keener focus on core services and disposals of uncompetitive units, presumably at the expense of some of its 73,000 staff.
The cost of such an overhaul was to be funded by a capital raising that will ask shareholders to part with £700m, as well as denying them of regular dividend payments.
While comparisons with Carillion were understandable, the government attempted to play such observations down.
Not another Carillion
A spokesman for the government said suppliers were being monitored: "We do not believe that any of our strategic suppliers including Capita are in a comparable position to Carillion."
Ken Odeluga, market analyst at City Index, also played down the comparison.
He said: "An important difference between Capita and Carillion is that the latter’s problems were linked to under-bidding on major contracts but Capita’s originate in routine services.
"Capita specialises in IT solutions for banks, the National Health Service, retailers and other sectors. Its string of profit warnings over the last few years stems from clients delaying new deals after Britain's vote to leave the European Union."
Margins too low
But tax expert Richard Murphy, blogging for Tax Research UK, raised a more fundamental issue that looked likely to be a concern for investors over the coming months.
He said: "Margins are clearly not sufficient to sustain the company in business as it is.
"That’s not a micro issue: this is about whether or not the whole frontier between the state and private sectors has been appropriately drawn for a couple of decades or more."
Markets will now look for quick results from Lewis, who has a reputation for reviving flagging businesses, like Amec Foster Wheeler, the oilfield services company.
Among the other UK companies that supply outsourced services, Serco Group was the worst hit, down 6.29% at 88.7p. Mitie Group fell 1.67% to 177.2p, while Babcock International lost 2.47% to 686p and G4S ended 0.87% lower at 284.3p.