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Canada's top IT services firm, CGI Group Inc. (GIB.A-T), agreed to buy larger Anglo-Dutch rival Logica Plc for $2.64 billion on Thursday, a move that more than doubles its size and helps serve multinational clients in Europe.
The deal, funded with debt and a $1 billion cash infusion from CGI's largest shareholder Caisse de dépôt et placement du Québec, will allow the Montreal-based company to cater to its many North American clients that also do business in Europe.
CGI's chief executive, Michael Roach, played down concerns about expanding into Europe at a time when euro zone countries are mired in economic woes.
"The vast majority of Logica's revenue is derived from Europe's largest economies - these include the UK, Germany, France and the Nordics, which are attractive markets," he told analysts on a conference call.
A sale of Logica would be the latest in a trend of British technology groups being snapped up by richer North American rivals. Banking IT company Misys is being bought by private equity group Vista, and last year U.S. technology giant Hewlett Packard Co acquired software company Autonomy.
Logica's shares, which were valued at 139 pence a year ago, were up 69 percent at 109.5 pence at 1552 GMT, trading above the offer price on hopes of a rival bid emerging.
The Logica deal will more than double CGI's annual revenue and number of employees, taking sales to about $10.4 billion and staff numbers to 72,000 in 43 countries, CGI said.
The increased scale will allow CGI to compete better against rivals including IBM, Accenture, Tata Consultancy Services, Cap Gemini and Infosys.
Desjardins Capital Markets analyst Maher Yaghi said the deal is positive for CGI, noting that the company has a long history of executing successful, profitable acquisitions.
"The transaction at hand appears to offer immediate earnings accretion, especially given the established position of Logica in the European market where CGI can leverage relationships to sell its products to clients," Yaghi wrote in a note to clients.
Logica, which issued a profit warning and outlined plans to slash 1,300 jobs late last year, has been hit hard by Europe's economic problems, as clients have shelved technology upgrades.
Analysts have said Logica, which services companies and governments, has been too slow to adapt to the changing market. Logica Chief Executive Andy Green said the company needed scale to compete for more multinational contracts, and its position had been weakened by uncertainty in Europe.
"We are in a competitively intense industry and it's a globalizing one where scale has become an ever more important factor in both cost competitiveness and in the service," he said.
Societe Generale analyst Richard Nguyen warned that the deal presents risks for CGI and could compress profit margins. He noted that CGI enjoys a margin of almost 15 percent on earnings before interest and taxes (EBIT), while Logica's margins are in the 6.5 to 7 percent range.
Nguyen warned that this could lead to potential EBIT margin dilution and a narrowing in the trading multiple premium that CGI enjoys against its peers.
Logica's investors will receive 105 pence in cash for each share, a 60 percent premium to Wednesday's closing share price, under the terms of the deal, which is backed by Logica's board and the holders of 18.2 percent of the stock.
"We think this is a good deal for Logica shareholders given the long-term structural challenges the group faces," said Roger Phillips of Merchant Securities. "We feel the CEO's strategic plan has failed to work and so the business is in a state of strategic drift."
Investec analyst Julian Yates said a rival bid for Logica could not be ruled out.
"Indian players may be seen as counter-bidders but this would represent a material strategic risk considering the cultural and business focus differences," he said.
Most analysts, however, dismissed the odds of a rival bid.
"We do not see any counter-offers from an offshore vendor, a European or global peer or a private equity player," said Daud Khan, an analyst with Berenberg Bank. He noted that Logica was too large for some of its Indian rivals to swallow and it would be too much of a distraction for some North American and European rivals at this time.
Logica was advised by Rothschild, Bank of America Merrill Lynch and Deutsche Bank, while CGI was advised by Goldman Sachs.