Wednesday, 10 June 2009

Capita buys Carillion IT Services but loses parent outsourcing deal

(By Anthony Miller – Wednesday 10th June 2009 8:30am). The news just after we went to press yesterday that Capita is to acquire Carillion IT Services (see here) is interesting from many angles. CITS was the IT services ‘captive’ of construction firm Alfred McAlpine which Carillion plc acquired in Feb. ’08. Capita is to pay £36m cash for CITS.

First the rationale. Capita needed more in-house IT services capability to support its burgeoning BPO contract portfolio. Capita has made a number of ‘interesting’ IT services acquisitions in the past, including PC reseller Computerland back in March ‘08 (see Capita buys Computerland . Why?) and – in a very prescient move – testing services firm Mission Testing, way,way back in 2002. We reckon that about 15% of Capita’s £2.4b revenues derive from ‘pure’ IT services, which makes them a Top 20 player in the UK IT services market alone. But it’s not enough. Capita also makes extensive use of IT services partners, such as Sopra UK, but has been keen for some time to boost its own IT services. CITS works very much at the infrastructure level, doing outsourcing, network management, cabling and the like.

Next, the ‘inadvertent’ omission from Capita’s news release that the CITS deal also came with a major IT outsourcing contract awarded to Accenture. Carillion plc is to outsource its IT services operations to Accenture, who already run its F&A and HR processes. Accenture is to pay Carillion £40m for the contract.

Which leads me to the final ‘interesting angle’, and that is CITS’ financials. According to Capita’s release, CITS is forecasting £3.7m operating profit on a £66m turnover this year, i.e. to Dec. ’09, a 5.6% margin. This values CITS at 1.8x revenue and nearly 10x EBIT, pretty rich for a 'low-level' IT services play. But here's a thing. A quick squizz at CITS accounts for the year to Dec. ’08 shows revenues of nearly £93m and a reported operating margin of 9.1%. However, this appears to include an exceptional profit of £3.9m from inter-company recharges, putting CITS ‘real’ operating margin closer to 5%. I guess the balance of CITS’ revenues – some £25-30m – is what Accenture is picking up in its outsourcing deal.

But it is really weird that Carillion did not choose to contract with Capita for its IT outsourcing – which is how most reciprocal acquisition/outsourcing deals work. It must have suited both Carillion and Capita to make a clean break but I will try and find out more.

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