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 makes $3.2bn IT services play

Contact: John Abbott

Japanese telecommunications giant Nippon Telegraph and Telephone (NTT) has made a surprise offer for one of its existing partners, Dimension Data Holdings, an LSE- and Johannesburg Securities Exchange-listed IT services firm with roots in South Africa. This is an unusually large acquisition for a Japanese company, worth 120 pence per share, approximately £2.12bn ($3.2bn) in cash. That’s just over a 15 times EV/EBITDA multiple and 18x the closing share price before the announcement. (NTT has plenty of cash, with about $10bn on hand).

The Dimension Data board has recommended the offer and NTT has assurances from the directors and major shareholders Venfin DD Holdings and Allan Gray covering 52% of Dimension Data’s issued shares. The deal is expected to close by the end of October.

NTT cited the cloud computing opportunity as the main motivation behind the transaction. It brings to NTT specialist managed IT infrastructure and services capabilities that can now be rolled out on a global scale. NTT has its own managed network services, datacenters, system integration and mobile services, but Dimension Data adds to the development, operations and maintenance side of IT infrastructure, including network devices and servers running in customer sites. Geographically, NTT’s main strengths are in Asia, followed by Europe and the US; Dimension Data is strongest in Africa, the Middle East and Australia. NTT rival China Mobile has been making noises recently about investments in South Africa.

Dimension Data was founded in 1983 and listed on the JSE four years later. A series of acquisitions, including that of Plessey South Africa in 1998 and the European networking business of Comparex Holdings in 1999, helped it grow to over $2bn in revenue by 2003. (The deals have continued, with eight listed in The 451 M&A KnowledgeBase since 2004). At the end of fiscal 2009, revenue hit nearly $4bn and net profit was $135m. The company has 11,500 employees and more than 6,000 clients. JPMorgan Cazenove advised on the transaction for Dimension Data and Morgan Stanley for NTT.