It's pretty rare to see a takeover that is almost universally lauded, but CGI Group Inc. appears to have pulled the rabbit out of the hat with its $2.8-billion purchase of Logica.
Analysts have praised the deal from the minute it was announced, and investors have sent CGI shares up 13 per cent today. You often don't see the acquirer's stock pop; just the target's.
Why is this deal so universally liked? A number of reasons. Looking at the purchase price, CGI paid 6.1 times earnings before interest, taxes, depreciation and amortization, which is right in line with the peer group. So the fear of overpaying isn't bearing down on management's shoulders – though they did offer Logica shareholders a hefty 50 per cent premium over the last month's trading price.
From a strategic point of view, the deal diversifies CGI's business geographically and broadens the company's customer base. As Richard Tse at Cormark Securities pointed out, before the deal, 95 per cent of CGI's revenue came from North America. Plus, Europe accounts for 30 per cent of global IT spending, and about two-thirds of CGI's top 100 clients have operations in both North America and Europe.
As for the client base, Mr. Tse noted that the biggest criticism of CGI has been its dependence on government spending, which now makes up 42 per cent of its revenues. After the deal, government exposure drops to 18 per cent.
Of course, not everything is so peachy. As Societe Generale pointed out, CGI's EBIT margins are 14.5 per cent, while Logica's are only 6.5 to 7 per cent. That's a big gap to close. And the two firms' aren't perfectly aligned. "Logica may be perceived as IP light, whereas IP-based development is CGI's core strategy at 20 per cent of revenues before the Logica acquisition," the research department noted.
Then there is the big elephant in the room. "Without a doubt, the main question here will be Europe and the risk associated with that market" Mr. Tse noted, adding that it's also why CGI isn't paying a hefty sum.
Is he worried? Not really. "Having followed this name over 10 years, we can tell you we've seen many acquisitions by CGI, with each successive deal being more successful than the previous. In our view, that's because the company has 'templated' an approach and we see no different when it comes to Logica."
Logica employs about 41,000 people and its client list includes ING, Volvo and Shell. If debt is included, CGI is buying the European firm for $3.3-billion.
To come up with this money, the Caisse de dépôt et placement du Québec is buying $1-billion of CGI sub receipts, and CGI is both taking out a $2-billion term loan, offered up by Canadian Imperial Bank of Commerce, National Bank of Canada and Toronto-Dominion Bank, as well as drawing $650-million from its existing facility. With all this borrowing, CGI's net debt will jump to 2.7 times EBITDA post deal.