Image may be NSFW.
Clik here to view.
Following the more promising update from Xchanging last month (see Xchanging’s reshaping gets underway), Xchanging has now sold off Cambridge Integrated Services Group (CISG), its troubled US workers’ compensation claims business, to third party administrator Sedgwick Claims Management Services for $22.7 (£13.8m) in cash - $3m of which will be held back in escrow for 18 months. In a conference call with investors, CE Ken Lever said the deal will “stop the bleeding of cash” from the US claims business, which he expected to have increased over time if Xchanging was to be successful in the market. Investors were certainly pleased by the news and pushed Xchanging’s shares up 9%.
Sedgwick is taking on “virtually all” of the contracts, assets, employees, current liabilities and future service obligations of CISG, as well as the liabilities. This includes CISG’s Medicare healthcare claims subsidiary Cambridge Galaher Settlements & Insurance Services. CISG is a sizeable operation. In FY10 ended 31 December, it had revenue of $113.4m, but made a loss before interest and tax of $8.2m.
The disposal can be nothing but good news for Xchanging. It brings to an end a painful US expansion following the now disastrous acquisition of Cambridge Solutions in 2008 (see Xchanging takes control of Indian partner). But it shows just how damaging the Cambridge acquisition has been to the company. As we noted back in February in Xchanging founder falls on his sword (update), Xchanging wrote off £100m, or two-thirds of the Cambridge business, but is retaining the offshore capability where it still sees value. Yesterday, we noted Serco’s £385m acquisition of Intelenet Global Services (see Serco’s expensive offshore gamble), and consider this to have many of the same risks, so we will be sure to keep an eye on how this one progresses.
But there is still a long way to go in Xchanging’s turnaround plan. The CISG disposal more than halves Xchanging’s US business, leaving it with a US ITO operation, certain BPO contracts for US customers, and an insurance software sales operation. This remaining US business (technology and procurement and HR) isn’t exactly the picture of health. In FY10 revenue declined 4% to £47.3m, and operating profits fell 25% to £4.2m. But Lever can’t fight fires on every front all at once, and at least this remaining US business is still profitable. He will now turn his attention to other “unsatisfactory” performing divisions such as its Italian Kedrios business, which won’t break even till 2013, and also continental Europe, where Xchanging needs to improve profitability, particularly in procurement and HR.
