May 31, 2012

CGI Group Acquires Logica PLC – IT Services M&A Activity Continues Hot Streak

Earlier today, Canada’s CGI Group Inc. announced the acquisition of British-based IT services firm Logica PLC for an equity value of £1.7 billion (equivalent to $2.6 billion). The deal represents the largest (and boldest) deal that CGI has ever done and comes at an interesting time as Logica has recently been struggling due to economic headwinds in Europe. Just a few months ago, Logica issued a profit warning and announced plans to cut more than 1,300 staff (approximately 3% of its 41,000 workforce). 

We view this deal as being a great value play for CGI. The implied EBITDA valuation multiple on an LTM basis was 7.2x while the revenue multiple was 0.5x. The valuation represents a nearly 60% premium to Logica’s share price the day prior to the announcement and a nearly 50% premium to the 30 day average. To put that into perspective, pre-announcement Logica was trading at roughly 5.0x EBITDA, which represented a significant discount to the public comparables. This discount was largely due to share price declines over the past 12 months do to Europe headwinds and attriting margins.  From CGI’s perspective, the deal is attractive as it will be immediately accretive in the range of 25% to 30% to CGI’s earnings per share excluding acquisition-related and integration costs.

We view this deal as a positive for CGI as it broadens the company’s geographic footprint across Europe, making it much more of a global player. The acquisition provides CGI a substantial base of European business particularly in the public sector (nearly 40% which is U.K. related) as well as access to robust base of new European commercial clients. On a combined basis, more than 50% of CGI’s revenue will now be derived from Europe, whereas it was previously less than 5%.