BUSINESS

CGI expects to be sixth-largest IT services company globally with acquisition

05/31/2012 03:34 EDT | Updated 07/30/2012 05:12 EDT
MONTREAL - Montreal's CGI Group stock closed at its highest level in more than a decade Thursday after it said it will become the sixth-largest IT services provider in the world under a friendly, $3.1-billion deal to acquire a U.K. company that will double the size of its global workforce and revenue.

Already Canada's largest IT services company, CGI Group said it has agreed to pay the equivalent of $2.8 billion to buy IT services firm Logica PLC. It will also assume Logica's net debt of $515 million, pushing the total value of the deal above $3.1 billion.

The combined company will have approximately 72,000 employees in 43 countries and revenue of $10.4 billion. CGI (TSX:GIB.A) currently has about 31,000 employees and $4.3 billion in annual revenues.

On the Toronto Stock Exchange, CGI stock jumped 13.99 per cent, or $2.94, to close at $23.95, its highest close since 2001.

CGI president and CEO Michael Roach described the deal as a "milestone day for both CGI and Logica."

"The proposed combination will create the sixth-largest IT service provider worldwide with a differentiated service portfolio and strong market positions in North America and Europe," Roach told a conference call to discuss the deal.

Particularly important to CGI is the big increase in the size of its European footprint, Roach said.

"Given our strong presence in North America, expansion into Europe has always been part of our strategic plan," he said.

"With only about five per cent of our revenue currently being generated in these markets, the European IT market is very attractive as it represents a market of approximately $200 billion euros, or 30 per cent of the world's IT spend."

Roach also said that the "vast majority of Logica's revenue is derived from Europe's largest economies," including Britain, Germany, France and the Nordics, which represent a "disproportional amount of Europe's IT spend."

Versant Partners analyst Tom Liston agreed that Logica operates in relatively stable countries, but there is still some concern given Europe's overall economic situation.

"The price paid, I think, factors in that risk substantially," Liston said from Toronto. "The reason why is that there are some challenges in Europe."

But he said the tech sector often holds up well even in bad economies as companies and governments use technology to save money.

"Tech spending on the software and services side tends to be a little more stable."

"There's always some concern in Europe but they (Logica) have some name-brand customers and reasonable stability within that base," he said.

Liston also said the strong Canadian dollar versus the euro helps CGI with the purchase.

BMO Capital Markets analyst Thanos Moschopoulos called the acquisition "transformative," noting it will more than double CGI's revenue base to $10.4 billion.

"All in all, we see this deal as positive for CGI," Moschopoulos wrote in a research note. "The transaction does increase CGI's risk profile and we would expect to see some multiple compression on the stock given integration risk...."

Moschopoulos said that CGI has a strong record of integrating its acquisitions but BMO is reviewing its estimates for CGI.

Roach said the acquisition positions CGI for more growth.

"In addition to operational breadth and depth, this combination brings critical mass and key client relationships which qualifies us for larger growth opportunities."

For shareholders, he said the transaction would create significant value and be immediately accretive in the range of 25 to 30 per cent to earnings per share.

Roach said that since CGI employees represent the largest single block of shareholders the company is very careful about what companies it buys, "always insisting on finding the right acquisition at the right price and at the right time."

"We believe we have found all three of these criteria with our proposed business combination of Logica and CGI, creating one of the very few independent and truly global end-to-end IT services providers," he said.

Pension fund manager Caisse de depot et placement du Quebec said it will invest $1 billion in CGI, helping the company finance its acquisition of Logica.

Logica shareholders will get 105 pence in cash for each share, 1.7 billion pounds in total, a premium of almost 60 per cent on Wednesday's closing share price.

Logica's board has unanimously agreed to recommend the deal to its shareholders, which is expected to close by the end of September.