Capita PLC (LON:CPI) shares tumbled more than 30% in morning trade after the troubled outsourcer warned on profits and announced plans for a rights issue and to scrap its dividend.
The news comes in the wake of the collapse of fellow contractor Carillion earlier this month, raising concerns that Capita faces the same fate.
READ: Carillion collapse: True scale of fundamental flaws being revealed, says Unite union
Shares dropped 35% to 225p at 8.20am.
Jonathan Lewis, who started as Capita’s chief executive two months ago, said “significant change” was required for the business.
“We are now too widely spread across multiple markets and services, making it more challenging to maintain a competitive advantage in every business and to deliver world class services to our clients every time,” he said.
In response, the group plans to sell off divisions, including its car park management business ParkingEye and contractor registry Constructionline. The proceeds will be used to pay down debts and reinvest in Capita’s core operations.
Net debt at the end of fiscal year 2017 was around £1.15bn.
Rights issue and profit warning
It plans to raise £700mln from shareholders later this year and will suspend its dividend until it generates a "sustainable free cash flow".
Capita said trading in the second half of 2017 was in line with expectations despite challenging market conditions.
However, it now expects 2018 underlying pre-tax profits to be lower at around £270mln to £300mln.
"There is likely to be a significant negative impact upon profits from contract and volume attrition, the dropping out of one-off items... and increases in some cost items,” Capita said.
"These headwinds are particularly expected to impact upon the financial performance of the Private Sector Partnerships, in both Insurance Services and Customer Management, Public Services Partnerships and IT Services division."
Capita tackles pension deficit
Capita is also undertaking a triennial review of its pension scheme to reduce its deficit, which stood at £381mln on June 30.
"Servicing a relatively high level of debt and nursing a large pension deficit is the main issue here, but if Capita can trim down its liabilities and focus on a handful of profitable businesses it could turn itself around," said David Madden, market analyst at CMC Markets.
Capita taking action to avoid same fate as Carillion
Madden added: "For some investors, today’s update from Capita will be reminiscent of Carillion as both companies have government contracts. Carillion collapsed but Capita Group are still in the game, and provided they undergo the necessary asset-stripping and capital raising, they could be on the road to recovery in the near-term."
Neil Wilson, senior market analyst at ETX Capital, said the similarities with Carillion are "all too clear" but Capita is taking steps to avoid the same fate.
"A rights issue to shore up the balance sheet – up to £700m, or about a third of the market cap before today – should certainly help," he said.
READ: Capita shares drop as it warns of 'subdued' outsourcing market
Capita's shares have lost around half their value in the past six months following a string of profit warnings.
In December the company said the market for major contracts remained subdued, particularly in the public sector.
A month later it announced the loss of a major contract with pensions giant Prudential PLC (LON:PRU).
READ: Capita shares drop as Prudential terminates contract for UK life and pensions administration
Like Carillion, Capita has several government contracts such as administering the pensions of Britain's teachers, supplying the Ministry of Defence with an electronic tagging service for criminals and running helplines for the Department for Work and Pensions.