UPDATE 2-UK outsourcer Capita targets asset sales in new restructuring

* Expects 500 mln pounds in sale proceeds in 2021

* 2020 pretax loss of about 49 mln pounds, smaller than prior year

* Sees 2021 organic sales growth, cash generation in 2022

* Three business on the block for sale, including Axelos

* Shares gain 10% in early trading (Adds market reaction, details on divisions, debt, asset sales)

March 17 (Reuters) - British outsourcer Capita will merge its businesses into two core divisions and seek to raise 700 million pounds ($974 million) from the sale of assets, the company said on Wednesday, launching its latest recovery plan.

Shares in Capita, which provides consulting and digital services to the public and private sector, gained about 4% in response to the plan, which follows COVID-19’s upending last year of a previous push to return to sustained profit and growth.

Almost 95% of the London-listed company’s stock value has been wiped out compared to 2015 peaks, and it posted another 49 million pound pre-tax loss for 2020 on Wednesday.

However, Chief Executive Jon Lewis, a turnaround specialist who took the helm in 2017, said that he expected Capita to return to organic revenue growth this year and generate cash sustainably in 2022.

“Despite the challenges, we have continued to make good progress, improving client relationships and winning significant new contracts,” he said in the results statement.

“Capita is a much better business than it was three years ago when we began our transformation.”

Britain’s outsourcing sector has struggled with the challenges of withdrawal from the European Union, forcing companies to shrink and rethink operations.

COVID-19 added to the pressure last year, weakening some businesses while strengthening others. At Capita, both reported and adjusted revenues fell around 10% in 2020.

The company, which was also the subject of buyout speculation last year, on Wednesday said it expected to raise 200 million pounds from already ongoing sales of its emergency services software, specialist insurance businesses, and the Axelos venture with the UK government.

Of the 700 million pounds Capita is targeting in sale proceeds, 500 million pounds are expected in 2021. It will also cut another 15% of office space this year as the shift to work-from-home ramps up.

The firm is also seeking to repay loans and meet debt covenants using proceeds from its asset sales after warning that it has about 440 million pounds due in the next two years. It also plans to extend maturities and seek new funding.

$1 = 0.7186 pounds Reporting by Pushkala Aripaka in Bengaluru, Editing by Sherry Jacob-Phillips, Patrick Graham and David Evans