Telecoms group KPN has agreed to buy struggling information technology services company Getronics for 766 million euros ($1 billion), making it the Dutch market leader in IT services.
KPN, which also beat analysts' expectations by posting flat second-quarter core earnings on Monday, said the cash take-over offer at 6.25 euros per Getronics share was part of its strategy to move from providing communications links to more value-added services in the business market.
The former Dutch telecoms monopoly will spend an additional 415 million euros to buy back Getronics' outstanding convertible bonds maturing in 2008, 2010 and 2014 as well as preference shares, Chief Financial Officer Marcel Smits said.
KPN shares fell 0.5 percent to 11.21 euros by 1329 GMT, while the DJ Stoxx telecoms index was down 0.4 percent. Getronics shares rose more than 20 percent to 6.15 euros.
KPN said several hundred jobs would be cut in the deal and it expected to generate annual synergies of 50 million euros from 2009. Getronics' tax losses that can be carried forward have a net present value to KPN of 100 million euros, it said.
Rabo Securities said KPN was paying an enterprise value of around 7.5 times Getronics' forecast 2007 core earnings, in line with the European sector. "One should bear in mind that Getronics has traditionally been trading at deep discounts to its peer group," the broker said.
KPN had been in exploratory talks with Getronics last year, but reached no deal at the time. "There have been major changes at Getronics. They have divested a lot of assets that we think they should have divested," KPN Chief Executive Ad Scheepbouwer told journalists on a conference call.
The offer is unanimously supported by Getronics' management and supervisory boards. KPN will keep Getronics' businesses in the Netherlands, Britain, Belgium and North America and continue the pending divestment of other non-core units, Scheepbouwer said.
The company plans to appoint new management when the deal is expected to close in the fourth quarter, and Getronics Chief Executive Klaas Wagenaar will leave the company. Getronics separately issued a trading update for the first half of 2007, reporting core earnings excluding exceptional items (EBITAE) of 34 million euros on revenue of 1.28 billion for a 2.7 percent margin.
A goodwill impairment of 50 million euros for its US business will push the company into the red for the full year, and Getronics also lowered its 2007 margin forecast.
"We are not really fond of the acquisition ... the internal organisation and operational performance of Getronics has been horrible in the past few years," Petercam analyst Thijs Berkelder said in a note. "We hope that KPN can quickly turn Getronics around."
SNS Securities analyst Victor Bareno said KPN would still have a significant amount of restructuring to do to raise Getronics' efficiency, adding the lack of scale of Getronics' activities in the United States and Britain remained an issue.
"It is difficult to solve the issue of scale in the international operations, but clearly as part of larger group, overall impact of disappointments or price pressure will be significantly less than for Getronics on standalone basis."
Europe's IT service companies have been the target of take-over activity in recent days. Pressure is mounting on them to offset high costs in their personnel-intensive industry through merger savings.
French IT service provider Group Steria also said on Monday it had agreed to buy British rival Xansa Plc in a deal valuing Xansa at around 472 million pounds ($960 million) to boost its earnings and market share.
The formal offer for Getronics is expected to be launched in September and will be conditional on at least 80 percent of Getronics' share capital being tendered. KPN was advised by ING Corporate Finance. ABN Amro acted as financial adviser to Getronics, and Rabo Securities for Getronics' supervisory board.