Capita's shares rise on defence contract, business sale

(Updates shares, adds detail)

By Arathy S Nair

June 19 (Reuters) - British outsourcing company Capita plc (LSE: CPI.L - news) said it had sold a supply chain business and won a government contract to provide firefighting services on military sites, showing progress in its turnaround plan and lifting its shares.

Capita, which raised 701 million pounds ($922 million) from investors in May after a series of profit warnings, said the sale of Supplier Assessment Services would help strengthen the company.

"This transaction marks a further step in executing the strategy announced in April aimed at simplifying and strengthening the business to deliver future success," Chief (Taiwan OTC: 3345.TWO - news) Executive Jonathan Lewis said.

Analysts said the price of 160 million pounds ($212 million) in the sale to private equity firm Warburg Pincus was higher than expected.

Capita shares were up 6.2 percent as of 1225 GMT, building on gains it has made since Lewis set out a strategy to refocus the company.

Analysts also welcomed the contract win, the first major deal awarded by the government since the collapse of Carillion (Frankfurt: 924047 - news) , a construction and outsourcing partner to the government which went out of business in January, rocking the sector.

The Unite (Frankfurt: 634811 - news) union said Capita had beaten rival Serco to the contract. Serco shares were down 1.4 percent.

But the union also warned that the provision of such key services, including in war zones, should not be farmed out to private companies.

The government said in a statement the contract would deliver a more modern and agile service and added that it had made robust assessments of the financial health of its suppliers.

Capita, which provides IT-led services for the public and private sector, has run into problems after chasing contracts on slim margins.

Lewis, who took over in December after working for oil services company Amec Foster Wheeler (Other OTC: AMCBF - news) , said in April that many of Capita's problems were self-inflicted, and could be tackled by doing "fewer things better".

The company is working to control costs, sell businesses and pay down debt.

Capita has lined up disposals worth 300 million pounds for this year, and more in the following two years, with a plan to return to revenue growth in 2020.

Jefferies analysts warned, however, that the new contract could be loss-making in the first two years despite contributing 40-50 million pounds in annual revenue.

Jefferies also noted that Capita's win was a surprise as Serco and rival Babcock indicated the contract had a mid- to high-single-digit margin while Capita usually targets margins of more than 10 percent.

($1 = 0.7602 pounds) (Additional reporting by Paul Sandle; editing by Keith Weir and Jason Neely)