CGI Group Boosted by Dell / Perot Deal

Includes: GIB, PER
by: FP Trading Desk

CGI Group lnc. (NYSE:GIB) [TSE:GIB.A] shares are getting a nice boost on Monday, rising 5% on the Toronto exchange and 2% on the NYSE after IT services competitor Perot Systems (NYSE:PER) was snatched up by PC giant, Dell Inc. (NASDAQ:DELL).

Dell will acquire all the outstanding shares of Perot for US$30/share in cash, representing a 67% premium to Friday's closing price. Dell indicated the Perot transaction will not be accretive until the fiscal year of 2012.

Eric Bernofsky said the deal for Perot, which operates in similar markets to CGI, is based on a lofty valuation of approximately 30x price-to-trailing earnings, 1.56x revenu and 13x EBITDA.

"Recall that the last major transaction completed in the IT services market was HP's acquisition of EDS in May 2008 for ~20x trailing EPS," he said in a note to clients.

The analyst said CGI could be valued at $20 to $30 based on Dell's offer for Perot, representing a very attractive upside of 65% or even more.

"While we do not believe CGI is a near-term take-out candidate, we cannot help but wonder if CGI would consider selling itself if it could attain the same lofty multiples as Perot. Recall that CGI is ~53% controlled by its founders," Mr. Bernofsky said.

"On the negative side, with CGI actively on the hunt for acquisitions (and we would not be surprised if it had an active file on Perot), higher sector valuations may limit its ability to complete an accretive acquisition. Note that Dell indicated the Perot transaction will not be accretive until FY12."