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Capita finally finds buyer for education software biz, private equity Montagu to pay £400m

Price believed to be £100m lower than initial estimates

Capita has agreed to offload its Education Software Solutions (ESS) biz to a private equity buyer for around £400m, which is understood to be £100m below its lowest valuation when the unit was put up for sale.

Under the terms of the agreement, Tiger UK Bidco Ltd, a newly formed offshoot of Montagu Private Equity, will cough £298m on completion and assume working capital and debt liabilities of £57m.

Montagu has also agreed to put money into ParentPay, another provider of education tech, and ESS will become part of the group once regulatory approvals are agreed. At that point, the private equity house will hand another £45m to Capita for ESS.

The proceeds from the sale will largely be used to pay down Capita's debts, which stood at £1.096bn in the six months ended 30 June 2020. ESS sells its own information system, SIMS, and support for 21,000 schools worldwide with financial management and process organisation software.

The sale is part of Capita CEO Jon Lewis's turnaround blueprint to cut loose any areas he feels are not core to his vision of the organisation. He said today he was pleased to sell ESS "after a comprehensive auction process".

He added: "The sale will help us simplify by disposing of a standalone business, while the proceeds will help strengthen Capita's balance sheet, as we build towards a more focused, sustainable business for the long term."

The CEO landed in the role in 2017 to steady the ship after a series of profit warnings and determined, following a period of review, that Capita was "too complex" and "driven by a short-term focus". A number of businesses have since been carved off, with ESS the latest.

Capita wants to concentrate on IT services, software, HR customer management and government BPO. The pandemic has meant that Capita will not break into profit this year and instead Lewis will be pinning his hopes on returning to the black next.

At the halfway stage of 2020, Capita turned over £1.815bn in sales for the six month ended 30 June and made a loss of £28.5m versus a profit of £31.2m in the same period a year earlier.

Additional disposals of standalone operating units will be confirmed in due course, the company told the London stock market today. "We will retain software assets that are catalysts for growing our other services, but plan to dispose of [areas]… that have little overlap or cross-sell with the rest of Capita, such as ESS."

The sale of ESS, which turned over £95m in Capita's financial year 2019 and reported EBITDA of £49m, perhaps wasn't as clear cut as management had initially hoped. The for-sale sign was hung outside corporate HQ in August and Capita was understood to be looking for between £500m and £700m.

Interested parties understood to include Bain Capital and TPG fell out of the discussions but Capita confirmed late last month it was in talks with Montagu.

Lewis pointed out that ESS will "benefit from a new owner wit the focus and means to supply further investment and growth, as the businesses transitions to its next-generation cloud-native software". ®

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