TheChek News Flow

India's Business Standard newspaper reported yesterday that both Capgemini and Atos

are in talks to acquire iGATE, a Nasdaq-listed 33,500-person offshore heritage business,

although the companies have not commented on the report. Over 27,500 of its staff

are based offshore, while over 5,000 are in the US, and the rest in Europe. Over three

quarters of sales are made into the US, 15% or so into Europe and 5% into Asia.

Offshore effort makes up about three quarters of activity, with two thirds of sales

coming from long-term contracts (including BPO), and a third from time-and-materials

activities. In 2014, it had sales of $1,268m (+10%) with an EBITDA of $276m/22%. By

industry, Banking and Insurance makes up about 40% of sales, Manufacturing 25%;

Healthcare 10% and Retail 10%. The top 5 clients make up nearly 40% of sales, with

GE (16%) and RBC (10%) its largest customers.

Atos and Capgemini both want a greater US presence, and Atos also wants to jumpstart

its offshore position (18k/21% vs 68k/47% at Capgemini). Capgemini has talked

of expanding its healthcare exposure in the US also, having sold-out to Accenture in

2005. While iGate has a useful exposure here, its large Banking and Insurance practice

is bigger, but would fit with Capgemini's strengths here nicely. For Atos, with Bull and

Xerox integration ongoing as well as iGate's high valuation, we question how willing it

would be to get into a bidding war for iGate.

iGate's shares are near post-2000 highs giving it a $3.4bn market capitalisation and it

trades at a 19x 2016E cons. PE and 10.8x EV/EBITDA. Assuming a 30% premium and

before any synergies are considered (likely modest anyway), we see similar c.16-18%

PBT accretion for Atos and Capgemini in 2016/17E, although Capgemini would get

additional cash tax benefits from its E&Y tax shield. For iGate, if it sold to Capgemini it

would be clearly subsumed into a much larger business than Atos, but one with a more

proven understanding of how to make offshoring work. If Atos acquired it (which we

see less likely), it would be able to shape the offshore proposition more clearly.