CGI, a Montreal-based supplier of technology services to retailers, utilities and banks, rose 14 percent to C$23.95 in Toronto, the highest close since March 2000. The stock has climbed 7.2 percent in the past 12 months.
The deal would double “CGI’s headcount and significantly strengthen its presence in Europe,” said RBC Capital Markets analyst Paul Treiber, who rates CGI an equivalent of a buy.
CGI’s bid, which would be its biggest acquisition to date, comes after the company spent $1.05 billion to acquire Stanley Inc. in the U.S. to compete with larger rivals such as International Business Machines Corp. (IBM) Now CGI is looking to Europe to expand where it sees a need for local companies to invest in IT services to boost their efficiency amid sluggish growth across the continent.
Logica cut its revenue forecast in December and sought to speed up restructuring efforts in its Dutch and Belgian businesses as clients deferred spending. The acquisition is the third major purchase of a British IT services and software company within a year following the sales of Autonomy Corp. to Hewlett-Packard Co. (HPQ) and Misys Plc to Vista Equity Partners LLC.
Other Bids Possible
Logica investors will get 105 pence per share, almost 60 percent more than yesterday’s closing price, CGI said today in a statement. Logica shares rose 69 percent to 110.90 pence in London, indicating investors’ anticipation that it may get a bid from another company. Before today, the shares had declined 52 percent in the past 12 months.
“Logica is one of cheapest IT service companies, and even at acquisition multiples it is attractive enough to flush out another buyer,” said Panmure Gordon & Co. analyst George O’Connor. “The potential buyers are numerous and Logica is simply badly configured for the modern market and is fixable given strong resolute management.”
Cap Gemini SA (CAP), International Business Machines Corp. and Dell Inc. are top candidates for a bid, Canaccord analyst Bo Nordberg said in an interview, adding that Logica shareholders may find a counterbid of 120 pence a share worth considering.
Spokespeople for for Cap Gemini and IBM declined to comment. A spokesperson for Dell couldn’t immediately be reached for comment.
Today’s offer by CGI implies an enterprise value of about 6.6 times Logica’s earnings before interest, taxes, depreciation and amortization last year, including net debt of 321.6 million pounds, CGI said. Takeovers of computer services and integrated systems providers in Europe in the past decade fetched a median multiple of 9.3 times, according to data compiled by Bloomberg.
“It’s a good deal for Logica shareholders at this price,” said Milan Radia, an analyst at Jefferies Group Inc. “It’s a timely transaction as Logica’s management was facing structural issues at the business combined with a substantial pressure on margin.”
CGI, which provides information technology and business-process services to about 31,000 professionals, said it expects the purchase to be completed by the end of September.
“It feels a very opportunistic offer,” said Daud Khan, an analyst at Berenberg Bank in London. “For Logica to be agreeing to 105 pence, it suggests that they were not confident in returning the company to growth and profitability. On a mid- to long-term basis, Logica is saying we cannnot survive.”
The two companies have very little geographical overlap, Logica Chief Executive Officer Andy Green said in a conference call today.
“It’s the right transaction at the right moment as the industry is globalizing,” said CGI CEO Michael Roach. “The industry is consolidating on a global basis as clients are consolidating on a global basis.” The expansion in Europe is “a logical step as the European IT market is very attractive” and worth about 200 billion euros a year, he said.
The purchase will be funded by the issuance of subscription receipts exchangeable for new shares in CGI to Caisse de Depot et Placement du Quebec, or CDP, and debt funding from a group of Canadian banks, CGI said.
“The strategic rationale behind the deal is to enable CGI to become a significant player in Europe and benefit from Logica’s positive dynamic in outsourcing, which now accounts for 45 percent of revenues,” Gregory Ramirez, an analyst at Bryan Garnier & Co, wrote in a note.
Logica’s directors, advised by Rothschild, Bank of America Merrill Lynch and Deutsche Bank AG, consider the terms “fair and reasonable,” CGI said. The company has agreements with Logica directors, as well as investors Schroder and Artemis, to acquire their shares in a court-sanctioned “scheme of arrangement.” The agreements cover about 18 percent of the stock. Goldman Sachs Group Inc. (GS) is handling the acquisition for CGI.
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