CGI growing globally with acquisition of Logica

Contact: Ben Kolada

Consolidation in the IT services segment took a leap forward today, as Canadian systems integrator CGI Group announced that it would pay £1.7bn (about $2.7bn), or £2bn when including net debt, for British counterpart Logica. We’ve already written about IT services deals happening on a smaller scale in the US, but this transaction takes the cake as being the largest cross-border deal since NTT bought Dimension Data in July 2010 for $3.2bn.

Specific to CGI, this is its largest acquisition on record, and comes almost two years to the day after it announced its previous high-priced transaction, the nearly billion-dollar purchase of systems integrator Stanley Inc. The Stanley buy itself was a geographic play, meant to expand CGI’s footprint in the US. The rationale for today’s reach for Logica is no different.

CGI is buying Logica as a pure geographic move meant to diversify its revenue globally. Currently, CGI’s revenue is split about half and half between the US and Canada, with only 6% coming from Europe. Logica, on the other hand, generates almost no revenue from North American operations. Its revenue mix is heavily slanted toward Western Europe, with its top three markets by country being France, the UK and Sweden. If and when the deal closes, the combined company will have a presence in 43 countries. The transaction will also more than double CGI’s revenue, creating the sixth-largest IT services provider worldwide.

Diversification is so key to CGI’s strategy that it is tapping nearly every possible outlet to pay for its larger rival. CGI will issue 46.7 million subscription receipts (exchangeable into new Class A shares), secure a £1.25bn term loan from CIBC, National Bank of Canada and Toronto-Dominion Bank, and draw down £405m from its existing credit facility.

Although dilutive, CGI’s shareholders so far approve of the acquisition. Shares of the Canadian company, which trade on the NYSE, were up 12% at midday. Although the deal would seem to undervalue Logica by one metric, its shareholders have reason enough to approve of the acquisition. While the transaction values Logica at about half times sales (the two most recent billion-dollar-plus IT services acquisitions, both announced last year, were done for 1x sales), CGI’s offer represents a heady 60% premium to Logica’s closing share price on May 30, and a 50% premium over the average closing share price for the prior month. Bank of America Merrill Lynch advised Logica on the deal.

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NTT continues global expansion, bags Netmagic

Contact: Ben Kolada

NTT Communications has made another move in the Indian datacenter services market, this time taking a 74% stake in Netmagic Solutions. Netmagic provides managed hosting, colocation and infrastructure management services, among others, from seven datacenters throughout India. This is the latest in a growing line of transactions NTT has inked that have been meant to expand the company’s global datacenter and cloud services footprint.

The deal is yet another international investment in datacenter and cloud services for NTT. In the press release announcing the transaction, the Japan-based telco noted Netmagic’s footprint in the growing Indian datacenter services market as among the top drivers for the acquisition. Our colleagues at Tier1 Research previously wrote that NTT subsidiary Datacraft has already been working with India-based telecom provider Bharat Sanchar Nigam Limited (BNSL). However, NTT said the deal has strategic benefits beyond India, and that it will accelerate its infrastructure and cloud services throughout greater Asia.

This isn’t the first India-specific or international move NTT has made in the datacenter or cloud sectors. In July 2010, the company announced that it was forking over roughly $3.2bn for Johannesburg-based Dimension Data, which also has a footprint in India. NTT cited the cloud computing opportunity as the main motivation behind that transaction. Almost exactly a year later, Dimension Data, then a subsidiary of NTT, announced that it was acquiring cloud, colocation and managed hosting provider OpSource. Although based in Santa Clara, California, OpSource’s cloud technology and capabilities will be sold throughout Dimension Data’s global footprint.