Canada's CGI to buy Logica to create global IT firm
LONDON/TORONTO (Reuters) - Canada's top IT services firm, CGI Group Inc (GIBa.TO) (GIB.N), agreed to buy larger Anglo-Dutch rival Logica Plc LOG.L for $2.64 billion on Thursday, a move that more than doubles its size, broadens its clientele and pushes it firmly into Europe.
The deal, funded with debt and a C$1 billion ($965 million) cash infusion from CGI's largest shareholder, Caisse de dépôt et placement du Québec, will let Montreal-based CGI vastly expand its European client base, while also catering to the needs of its many North American clients that do business in Europe.
The new firm will rank No 6 in the world and will be in a better position to compete against rivals including IBM (IBM.N), Accenture (ACN.N), Cap Gemini (CAPP.PA), Tata Consultancy (TCS.NS) and Infosys (INFY.NS).
"The transaction at hand appears to offer immediate earnings accretion, especially given the established position of Logica in the European market where CGI can leverage relationships to sell its products to clients," Desjardins Capital Markets analyst Maher Yaghi wrote in a note to clients.
CGI shares rose 14 percent to C$23.95 in Toronto, while its New York-listed shares rose 13.7 percent to $23.21. Logica's shares closed 69 percent higher at 110.9 pence, well above the offer price on hopes of a rival bid emerging.
CGI Chief Executive Michael Roach played down concerns about the company's expansion into Europe at a time when euro zone countries are mired in economic woes.
"The vast majority of Logica's revenue is derived from Europe's largest economies - these include the UK, Germany, France and the Nordics, which are attractive markets," he told analysts on a conference call.
A sale of Logica, expected to close by September subject to shareholder and regulatory approvals, would be the latest in a trend of British technology groups being snapped up by richer North American rivals.
Banking IT company Misys is being bought by private equity group Vista, and last year U.S. technology giant Hewlett Packard Co (HPQ.N) acquired software company Autonomy.
The Logica deal will more than double CGI's (GIB.N) annual revenue and number of employees, taking sales to C$10.4 billion and staff numbers to 72,000 in 43 countries, CGI said.
Logica, which issued a profit warning and outlined plans to slash 1,300 jobs late last year, has been hit hard by Europe's economic problems, as clients shelved technology upgrades.
Logica Chief Executive Andy Green said the company needed scale to compete for more multinational contracts, and its position had been weakened by uncertainty in Europe.
"We are in a competitively intense industry and it's a globalizing one where scale has become an ever more important factor in both cost competitiveness and in service," he said.
But Societe Generale analyst Richard Nguyen said the deal presents risks for CGI and could compress profit margins. He noted that CGI enjoys a margin of almost 15 percent on earnings before interest and taxes (EBIT), while Logica's margins are in the 6.5 to 7 percent range.
Nguyen said this could dilute EBIT margin and narrow the trading multiple premium that CGI enjoys against its peers.
Cormark analyst Richard Tse said the takeover benefits CGI, as it not only broadens the company's geographic presence, but also its industry exposure.
"One of the main criticisms we hear most often on CGI Group is its heavy exposure to government," said Tse, noting that the deal will reduce CGI's government exposure to 18 percent from 42 percent.
Excluding acquisition and integration costs, the deal is expected to boost CGI's earnings by 25 percent to 30 percent.
The deal also allows Quebec pension fund Caisse to raise its stake in CGI. Caisse will get 46.7 million subscription receipts exchangeable into new Class A shares in CGI at C$21.41. It will own 25.1 percent of CGI subordinate shares when the deal closes.
CGI will draw C$650 million from an existing credit facility and use C$2 billion in debt to fund the deal. The debt package is being arranged by CIBC (CM.TO), National Bank of Canada (NA.TO) and Toronto-Dominion Bank (TD.TO).
Logica investors will receive 105 pence in cash for each share, a 60 percent premium to Wednesday's closing price, under the deal, which is backed by Logica's board and the holders of 18.2 percent of the stock.
"We think this is a good deal for Logica shareholders given the long-term structural challenges the group faces," said Roger Phillips of Merchant Securities. "We feel the CEO's strategic plan has failed to work and so the business is in a state of strategic drift."
Investec analyst Julian Yates believes that a rival bid for Logica cannot be ruled out.
"Indian players may be seen as counter-bidders but this would represent a material strategic risk considering the cultural and business focus differences," he said.
Most analysts, however, dismissed the odds of a rival bid.
"We do not see any counter-offers from an offshore vendor, a European or global peer or a private equity player," said Daud Khan, an analyst with Berenberg Bank. He noted that Logica was too large for some of its Indian rivals to swallow and would be too much of a distraction for some North American and European rivals at this time.
Logica was advised by Rothschild, Bank of America Merrill Lynch and Deutsche Bank, while CGI was advised by Goldman Sachs.
($1 = 1.0358 Canadian dollars)
(Editing by Mike Nesbit, Matthew Lewis and Janet Guttsman)
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