UPDATE 4-CGI expands U.S. IT business with Stanley deal

Fri May 7, 2010 1:06pm EDT

* Extends CGI's U.S. footprint to defense, intelligence

* Offers is 29 pct premium to Stanley's Thursday close

* Boards of both companies approve transaction

* Stanley shares up 27 pct at $36.82 on the NYSE (Recasts, adds analyst comment, details on deal; All figures in U.S. dollars unless noted)

By Euan Rocha

TORONTO, May 7 (Reuters) - CGI Group Inc (GIBa.TO) said on Friday it agreed to buy rival IT services provider Stanley Inc (SXE.N) for about $900 million in cash to extend its U.S. footprint into the defense and intelligence agencies.

The deal gives CGI, Canada's largest technology outsourcing and consulting company, a much greater presence within the U.S. government arena, where much of its business currently centers around providing services to state and local governments.

The technology services sector has attracted investor interest over the last 12 months, as large hardware vendors have made acquisitions, lured by attractive revenue streams.

Last September, Xerox Corp (XRX.N) agreed to acquire Affiliated Computer Services for $5.5 billion, while Dell Inc DELL.O agreed to buy Perot Systems for $3.9 billion. Analysts said the acquisition of Stanley will result in the United States accounting for almost 50 percent of CGI's revenue mix, up from about a 35 percent level.

"Strategically this is a very strong acquisition, as they (CGI) have a really strong presence in the U.S. government (sector), but it is more on what you would call the civilian side," said Versant Partners analyst Tom Liston.

"Stanley has a really strong presence in areas like defense, cyber-security and intelligence. So this is a very good strategic fit, as there is not a lot of overlap."

Montreal-based CGI, which was founded in 1976, also provides services to a wide range of companies from Bombardier to Cirque du Soleil, and Pfizer to DirecTV.

DEAL VALUE

CGI offered $37.50 a share, a 29 percent premium to Stanley's closing price on Thursday on the New York Stock Exchange.

Based on 24.1 million Stanley shares outstanding as of the end of 2009, the deal is worth about $900 million. CGI said the value of the deal was about $1.07 billion, including debt.

Stanley's shares, which closed Thursday at $29 on the New York Stock Exchange, were up 27 percent at $36.82, while those of CGI were down 1.8 percent at C$14.92 on the Toronto Stock Exchange.

Funding for the transaction, unanimously approved by the boards of both companies, will come from cash on hand and existing credit facilities.

Arlington, Virginia-based Stanley has agreed to refrain from soliciting competing offers. In addition, some of its board members and executive officers have signed voting agreements in support of the offer.

CGI said the combined companies would have total annual revenue of $4.5 billion, with a booked backlog of more than $13.5 billion.

The deal, which is expected to close in the second half of 2010, will boost earnings within 12 months of closing.

Stanley would become part of the company's CGI Federal Inc subsidiary, which provides services to U.S. government agencies.

Deutsche Bank (DBKGn.DE) and Toronto Securities (TD.TO) acted as financial advisers to CGI, while Sagent Advisors acted on behalf of Stanley.

MORE DEALS LIKELY

CGI still has the appetite and capacity to look at further acquisitions, said CEO Michael Roach, while addressing analysts and investors on a conference call.

"We certainly have the capability to continue to look for acquisitions and we will do so, both within the United States and Europe," said Roach. "We believe that valuations are very attractive in Europe as we sit here today."

One analyst noted that he would like to see CGI expand its presence in U.S. commercial markets.

"We continue to believe that CGI's bigger challenge in increasing brand awareness and competitive traction, is on the commercial side of the U.S. market," said UBS analyst Jason Kupferberg, in a note to clients.

Last year, some analysts and bankers speculated that CGI itself could be a possible takeover target, for some of the larger hardware and information technology companies operating in the space. [ID:nN28526962]

"We continue to believe that consolidation will remain an active theme in the government IT sector," said Kupferberg, who lists ICF International (ICFI.O), SRA International SRX.N, NCI (NCIT.O), and Dynamics Research DRCO.O among the possible takeover targets within the sector. ($1= $1.03 Canadian) (Reporting by Euan Rocha in Toronto and Isheeta Sanghi in Bangalore; editing by Frank McGurty)

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