May 31, 2012 5:39 pm

CGI / Logica

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More than a whiff of opportunism hangs over the deal

All things come to pass – even an end to Logica’s independence. Years of bid speculation ended on Thursday when the Anglo-Dutch IT services group finally secured a marriage offer from Canada’s CGI. The latter’s recommended cash bid, at 105p a share, puts a £2bn enterprise value on Logica, and starts with irrevocable acceptances from two investors holding almost one-fifth of the equity. These will fall away only if a rival offer is pitched at least 10 per cent higher.

The deal has some rationale. The Canadian IT services group, whose 2011 revenues were two-thirds of Logica’s, draws almost all its business from North America; Logica gets 94 per cent from Europe. So marriage would allow both to support their globalising private sector client bases and, if managed well, should provide cross-selling opportunities. The deal will be immediately accretive to CGI (management estimates by 25-30 per cent before deal and integration costs). And reasonable synergies are promised – £125m a year after three years – for a one-off £165m cost.

But the terms are hardly knockout, and more than a whiff of opportunism hangs over the deal. True, the offer is a 60 per cent premium to Logica’s undisturbed price ahead of the announcement. But that has been hit by Europe’s malaise, especially in the public and financial services sectors, and the need to restructure and drive down costs in parts of Logica’s business. Logica shares traded in the 120p-140p range during the first seven months of 2011. The exit multiple is 10 times 2012 earnings – so no premium compared with peers such as Capgemini – and the enterprise value to earnings before interest, tax, depreciation and amortisation ratio is under 7. That might leave room for a rival bidder to emerge. Long-suffering Logica shareholders should sit tight for now. An end is in sight.

Email the Lex team in confidence at lex@ft.com

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