CGI Passes RIM as Investors Back European Bet
CGI Group Inc. (GIB/A)’s $2.6 billion bid for Logica Plc (LOG) catapulted it past Research In Motion Ltd. (RIM) to become Canada’s most valuable technology company as investors embraced its bet on Europe.
“Multiples of European companies have been dropping, the dollar has strengthened against the pound and financing conditions are attractive,” CGI Chairman Serge Godin said yesterday in an interview in Montreal. He founded the company in 1976 before handing over the top job to Chief Executive Officer Michael Roach in 2006. “The stars were aligned.”
Over the past decade the two men have spent at least $6 billion buying more than 20 companies, gaining scale to compete with the likes of International Business Machines Corp. in selling automation services. The cash offer, partially funded by Canada’s second-largest pension fund manager, is a wager that Logica’s clients such as France Telecom SA (FTE) and tire maker Michelin & Cie (ML) will invest in technology services to boost efficiency as Europe struggles to recover.
Investors applauded the deal yesterday, lifting CGI’s stock 14 percent to a 12-year high in Toronto before it fell 2.4 percent to C$23.37 at 4 p.m. today. Yesterday’s gain vaulted it past struggling BlackBerry maker RIM in terms of market value. CGI is worth C$6 billion ($5.8 billion). After falling more than 90 percent from its mid-2008 high, RIM is worth C$5.6 billion. CGI has more than doubled over that same period.
RIM’s stock fell 7.1 percent on May 30 after the Waterloo, Ontario-based company said it expects an operating loss for this quarter, plans to cut “significant” jobs as sales of its aging lineup of BlackBerry phones slump and is considering strategic options, including a possible sale.
Of 18 analysts who track CGI, 13 rate it a buy, four a hold and one a sell. By contrast RIM has just four buys, 30 holds and 14 sells.
CGI joins other North American investors finding opportunity in Europe even amid concerns that Greece’s possible exit from the euro zone could throw the currency union into turmoil.
“Whatever happens to the euro has no bearing on how we view Europe,” Godin said. “Global companies are still going to do business there, governments are still going to function.”
Laval, Quebec-based Alimentation Couche-Tard Inc., North America’s largest convenience store operator, is spending about $2.6 billion to buy Statoil Fuel & Retail ASA (SFR), which runs gas- station stores across Scandinavia and Eastern Europe. Carlos Slim, the world’s richest man, last month said he would invest $3.4 billion to lift his stake in Dutch wireless carrier Royal KPN NV (KPN) through his company America Movil (AMXL) SAB, counting on bargain valuations.
“Carlos Slim is right when he says now is a good time to invest in Europe,” Godin said. “Information technology is an essential service. Whether you’re a government transforming your social programs or a company launching a new product, information technology is always going to be there to support what you are trying to achieve.”
The company’s acquisitions over the last five years have been well timed and executed, said Keith Farrant, who manages about C$800 million including CGI shares for Claret Asset Management in Montreal.
“They’re going in when people are fearing so they’re getting a pretty good price,” Farrant said. “If they were to expand in Europe, it’s probably a good time to do it now. If you waited until everything is rosy, you’d be paying much higher premium.”
The acquisition of Logica, if successful, would transform Montreal-based CGI, lifting its number of employees to 72,000 worldwide from 31,000 and more than doubling sales to C$10.4 billion. That still leaves it a fraction the size of Armonk, New York-based IBM (IBM), which last year generated revenue of $106.9 billion and has about 433,000 employees.
CGI first took a serious look at its U.K. counterpart in 2007, Godin said in the interview. Talks accelerated in the past six months culminating in yesterday’s announcement.
Logica investors will get 105 pence per share, almost 60 percent more than the previous day’s closing price, CGI said in a statement. Logica shares yesterday jumped 69 percent to 110.9 pence. Analysts including Canaccord Financial’s Bo Nordberg said it could attract a counterbid of 120 pence from the likes of Cap Gemini SA (CAP) and IBM.
Spokesmen for Cap Gemini and IBM declined to comment.
Godin said he doesn’t expect a counterbid because any other bidder would probably have to fire “thousands” of workers, whereas Logica and CGI are complementary. He and Roach stressed yesterday there is little geographic overlap between the two businesses.
Logica, which gets about 90 percent of revenue from Europe, has sought to speed up restructuring efforts in its Dutch and Belgian businesses as clients deferred spending. CGI earned 91 percent of revenue last year from the U.S., Canada and India.
“With us, the integration of the two companies is going to be much easier,” he said.
The purchase will be funded by the issuance of C$1 billion worth of subscription receipts exchangeable for new shares in CGI to Caisse de Depot et Placement du Quebec, and debt funding of C$2 billion from a group of Canadian banks, CGI said. Canadian Imperial Bank of Commerce, National Bank of Canada and Toronto-Dominion Bank (TD) are the underwriters on the purchase, CGI said.
Godin, who said he’s done 71 acquisitions in his time as CEO and chairman of CGI, sounds like he’s not done yet. While he said the company will spend as much as 18 months integrating Logica, CGI will then take a closer look at expanding in Asia, using Logica’s footprint there.
“Already, within Logica there are operations in the Asia Pacific region with a nice critical mass,” he said.
“In terms of doing a larger acquisition to become truly global with an important presence in Asia, that’s going to take three or four years.”