In its largest deal to date, Telus International Inc. is acquiring WillowTree, a U.S.-based mobile application and technology company, for US$1.2-billion as part a bid by the digital services provider to expand its customer base.
Vancouver-based Telus International, which is controlled by Telus Corp., is paying US$1-billion for WillowTree, US$125-million of which will be settled in Telus International shares. The remainder of the acquisition will be paid for in cash. The company will also take on an additional US$210-million in debt.
Some WillowTree management team members have agreed to reinvest a total of US$160-million into shares, which can be cashed out if the company meets certain performance targets.
Analysts say that while the acquisition did not come cheap, WillowTree’s skills in mobile technology will help fill a gap in Telus International’s expertise and introduce a variety of high-profile clients and new industries to its portfolio. However, some observers have raised some concerns about the amount of leverage that the company has taken on.
WillowTree, founded in Charlottesville, Va., in 2008, brands itself as a full-service digital-product consultancy, offering software, design and marketing tools to companies expanding their presence online. The company has more than 1,000 employees in Canada, South America and Europe. In 2021, WillowTree’s revenue was approximately US$140-million, up 50 per cent from the previous year, according to figures provided by Telus International.
Majority stakeholder Insignia Capital Group will sell its stake in WillowTree after initially investing in the company in 2018.
The deal follows Telus International’s long-held strategy toward developing its full-service tech consulting offerings. Chief executive officer Jeff Puritt told The Globe that the acquisition will help the company become top-of-mind as a tech consulting firm at a time when the stakes are higher for businesses developing their digital strategies amid inflation, supply chain issues, and continuing recession.
“Having a capability that is able to address and mitigate ... those fears, concerns, and deliver as promised on time, I think is more important than ever,” Mr. Puritt said.
He said the acquisition will help the company expand its business particularly within the health, agriculture and consumer goods sectors.
In a note to investors, Desjardins analyst Jerome Dubreuil said that despite the high price, given the depressed valuations of many tech sector companies, the rationale for the deal was nonetheless strong, noting that WillowTree’s experience will help boost Telus’s reach into mobile applications, which to date has not been among the company’s core expertise.
WillowTree will also bring with it a roster of Fortune 500 clients, including PepsiCo. Inc., Fox Corp., Marriott International Inc. and CBC.
Nonetheless, markets reacted negatively, with Telus International stock down per cent for the day at
Credit rating agency Moody’s Investors Service indicated in a note to investors that the acquisition is credit-negative, meaning that the added debt has moved the company’s bond towards an overleveraged position. However, Moody’s maintained the company’s bond rating at Baa1, meaning the bonds are subject to moderate credit risk.
“Telus currently has a negative outlook because we question management’s willingness and ability to deleverage without equity issuance or asset sale proceeds used to reduce debt,” wrote analysts Peter Adu and Paresh Chari in the note.
The deal is anticipated to close in January, 2023, and is subject to regulatory approvals.