Capita will look to sell its education software solutions (ESS) unit for at least £500 million as the listed business services provider’s board this week prepares to approve an auction, EducationInvestor Global can exclusively reveal.
This publication has learnt that the FTSE 250 firm is in advanced discussions with bankers from Goldman Sachs about selling Capita ESS, whose platform SIMS is reportedly used by 80% of UK schools.
Capita’s board is set to convene virtually this week and greenlight a sale of the unit, which is expected to launch as soon as next month and close in the third quarter.
No final accord has been reached and talks could yet fall apart.
For Capita ESS, which generates EBITDA of around £50 million a year, auctioneers will target a price-to-earnings multiple of between 10 and 14, one source said – indicating that the business could fetch between £500 million and £700 million.
The company, which caters to 21,000 schools and 160 universities worldwide, will draw attention from trade buyers – such as Civica, PowerSchool and IRIS – as well as private equity funds, sources said.
One source described Capita ESS as the “crown jewel” of the parent company and said it is “one of the most cash-generative assets” that Capita owns.
Strategic consultancy McKinsey & Co has won a sell-side due diligence mandate, according to one source – though this could not be corroborated.
Capita, Goldman Sachs and McKinsey did not respond to requests for comment.
Capita SIMS, which stands for school information management system, is a back-end service developed in the early 1980s that allows schools to collect and monitor data on student attainment, parental engagement and financial management. It lists more than 50 products on its website.
Demand for school software solutions in the UK has grown in line with the increasing prevalence of multi-academy trusts (MATs), which require centralised systems to keep tabs on as many as several dozen schools’ finances and operations.
Meanwhile, the influence of local authorities wilted as the market consolidated, leading councils across the country to pare back, offload or wind down their education services divisions as school groups increasingly turned to private providers offering one-stop solutions.
Capita SIMS was the first-ever management information system provider geared at schools.
Described by one source as having a “monopoly” on the UK school market, it is currently used by more than 21,000 schools in 49 countries, according to its website.
However, one source suggested that Capita SIMS is losing approximately 2% market share a year to providers such as Arbor, Bromcom, ScholarPack and Pupil Asset, which was acquired earlier this month by private equity-backed Juniper Education.
Several sources criticised Capita SIMS over its “legacy issues”, which developed as the decades-old company built out its suite of products and offerings, creating layers of “clunky” technology in the process.
Two sources said that Capita SIMS, which requires schools to store data on physical servers, has lost market share to cloud-based rivals, which created joined-up solutions that compile information more efficiently on centralised systems.
“SIMS’ data is held on individual servers within schools, meaning it can’t be analysed easily by MATs, whereas cloud-based solutions are designed to overcome this,” an insider said.
Capita SIMS unveiled a cloud-based solution for primary schools, SIMS Primary, in 2018, but its market penetration is understood to be limited in comparison to its flagship product.
Changing providers can be a cumbersome and time-consuming process, because staff require re-training and data needs to be migrated – which is why, according to sources, many schools renew their contracts with Capita SIMS rather than switching.
Though Capita SIMS has won several industry awards, its origin is marred by controversy.
In 1982, the firm’s founder Philip Neal wrote a programme allowing teachers to produce computerised pupil reports that was later developed using funds belonging to Bedfordshire council, which ultimately transferred the assets to a private holding company.
Former Labour MP Margaret Moran described this as using council resources to effectively set up a private business.
Rival provider Bromcom has on three occasions referred Capita SIMS to the now-defunct Office of Fair Trading.
In a complaint filed in 2009, Bromcom alleged that Capita SIMS had overcharged UK schools by £75 million over a 10-year period – but the OFT declined to investigate.
Date published: 18 June 2020