Shares in Capgemini fell almost 3% in morning trading on Friday.
Capgemini responded to the announcement by saying it is in strong disagreement with S&P, and reiterated that it would meet its operating margin guidance of 2% for the second half of 2004, and its margin would improve in 2005. It also expects to have a net cash position of E350 million ($462 million) at the end of 2004.
S&P expects Capgemini’s operating margin to be more than 3% in 2005, compared to an estimated 1% margin in 2004. However, this is below Capgemini’s peers, which S&P said generally exceed margins of 5%. French rival Atos Origin, for example, reported an operating margin of 8.2% in its year ended December 31, 2003, and it expects a 7% margin in 2004, while US rival Accenture reported an operating margin of 12.9% in its full year ended August 31, 2004.
S&P flagged up Capgemini’s North American operation as a particular concern, having reported a E32 million ($42.2 million) EBIT loss in the first half of 2004, including a E38 million ($50.2 million) loss within the technology division.
The North American operation has been the subject of much speculation, notably that Capgemini had been looking to extricate itself from the loss-making practice through a sale. However, this has since been denied, and in a statement, Capgemini said its turnaround strategy in 2005 will focus on repositioning the US operation, and returning to a satisfactory profitability level.
Another concern for Capgemini are the costs associated with many of its large outsourcing deals. The largest of these is a $3.5 billion business process outsourcing contract with energy giant TXU announced in May 2004, which involved the transfer of some 2,700 people to a new division called Capgemini Energy. Capgemini said this is the only contract it has that includes a rating trigger, but despite the downgrade, it said TXU had committed to continuing the contract.
However, S&P said it could lower its rating on the company a further notch if its liquidity weakens. If this were to happen, it could also have serious repercussions for the TXU deal.
