NEC to Acquire IT Services Business of CSG for up to A$260m, 7.5*EV/EBITDA

30th May 2012. CSG Limited (ASX: CSV) has announced an agreement to sell its Technology Solutions business to NEC Australia, a wholly owned company of Tokyo-listed NEC Corporation(TYO:6701). The transaction, for CSG’s managed services, enterprise services and strategic consulting business, comprises a base consideration of A$227.5 million; and a potential earn-out payment of up to A$32.5 million. The quantum of the earn-out payment achieved, if any, will depend on the level of certain additional earnings generated prior to 30 June 2012.

Industry analysts put the deal at 6.5 to 7.5 times EV/EBITDA depending on whether CSG hit its earn-out target, well above the company’s trading range over the last year and reflecting the fact that NEC is buying its premium assets.

The sale is due to be completed by July 2. Following the successful completion of approvals for the sale, the Technology Solutions business, comprising the two subsidiaries, CSG Services Pty Limited and CSG Solutions Pty Limited, will operate as an independent business unit of NEC Australia with senior executives reporting directly to Alan Hyde, Managing Director, NEC Australia. The integration of the two businesses was expected to take around 12 to 18 months.

This acquisition is consistent with NEC Corporation’s global growth strategy to further develop its ICT services capabilities. It also strongly supports NEC Australia’s vision of becoming a leading Australian ICT services company and significantly broadens its capability set in high growth services such as ERP, CRM, Business Intelligence, managed services and cloud based business solutions.

“The new organization will have the capabilities and scale to successfully compete for some of Australia’s largest ICT contracts,” said Dr. Nobuhiro Endo, President of NEC Corporation. “It also provides a comprehensive solution and services platform to strategically extend Asia Pacific business development opportunities for communications and IT solutions and services growth.”

NEC Australia managing director Alan Hyde has advised that the company is aiming for a place among the top five local IT services providers within five years. According to Ovum Group, the acquisition puts NEC into 10th spot, taking it from an exstimated $60m to $230m, and well short of No 5 provider Fujitsu’s $800m. Overall, the deal pushes NEC’s group income to about $480m. The Australian market is dominated by multinational. By revenue, IBM leads with $1.8 billion, just ahead of Hewlett-Packard on $1.7bn. Accenture is 3rd on $957m, CSC 4th on $828m, followed by Fujitsu on $800m.

“We’re not at the right size point. I want to be bigger and we’re going to be bigger,” Mr Hyde said. “Right now we’re going to roll up our sleeves and work really closely with this business so there’s no (acquisitions) on the boil right now but I won’t rule out anything in the future.”

CSG Chairman, Mr Josef Czyzewski said: “Following a detailed and rigorous strategic review by the Company, the decision to sell the Technology Solutions business has been made to crystallse value for our shareholders. The Board believes this transaction is in the best interests of the Company and its shareholders. The proceeds from the sale will enable us to pay down debt and return capital to our shareholders.”

CSG has net debt of about $110 million, resulting in net proceeds from the transaction on the base consideration, after capital gains tax and other transaction related costs, expected to be approximately A$190 million.

Post transaction, CSG will have substantial franking credits for distribution. The Board of Directors’ intention is to distribute excess capital to shareholders in the most efficient manner after paying capital gains tax, restructuring and transition costs and reducing debt to an appropriate level. The method, timing and amount of cash distributed to shareholders will be determined by the Board. This is expected to be announced with the full year results in August 2012.

Terms of transaction

The transaction will be effected via a sale of the shares in two subsidiary CSG companies: CSG Services Pty Ltd and CSG Solutions Pty Ltd to NEC Australia.

The target completion date of the sale is 2 July 2012. It is subject to a number of conditions including: obtaining Foreign Investment Review Board approval; regulatory approvals; and limited third party consents.

The purchaser also has a termination right if there is any material adverse change in the Technology Solutions business. In certain circumstances, termination of the agreement will entitle the party not in breach to a break fee of A$2.6 million. CSG has agreed to certain limitations on its ability to initiate or respond to any competing proposal in relation to the Company or its Technology Solutions business. CSG has also agreed it will not carry on a technology solutions business for three years post-completion in Australia and for two years
post-completion in New Zealand. The restraint will not inhibit CSG’s ability to grow its Print Services business.

Mitsubishi UFJ Morgan Stanley Securities acted as exclusive financial adviser, and Corrs Chambers Westgarth acted as legal adviser to NEC/NEC Australia.

CSG has also entered into a Transitional Services Agreement to facilitate the orderly transfer of the Technology Solutions business. NEC plans to operate CSG’s technology solutions division — comprising CSG Services and CSG Solutions — as an independent business unit of NEC Australia. NEC Australia managing director Alan Hyde has advised that all 850 of CSG’s technology solutions staff would be integrated into NEC Australia, with senior executives reporting directly to Hyde

CSG Managing Director, Ms Julie-Ann Kerin said: “Following the sale of Technology Solutions we will focus on the growth and development opportunities within the Print Services businesses.”

Following the completion of approvals for the sale, the Technology Solutions business will operate as an independent business unit of NEC Australia. However, the group will be eventually re-branded as NEC as the company did not acquire the rights to use the CSG name.

CSG has been fielding offers from buyers since last year. The company was expected to announce a buyer late last year, after an announcement that was the subject of a non-binding off-market acquisition offer in September 2011, followed by another offer of $340 million from an unnamed bidder in October that year. CSG’s efforts to find a buyer appeared to collapse and no sale was announced. The sale process was revived early this year when CSG agreed to carve out its subsidiaries, CSG Services Pty Limited and CSG Solutions Pty Ltd, for a separate sale. Mr Hyde has advised that NEC was not one of the company’s bidding for NEC last year. He advised it had started negotiating with CSG on the sale in January. At this time, CSG announced a profit warning and the exit of long-time managing director and 19.5 per cent shareholder Denis Mackenzie.

CSG’s share price at close on Monday was $0.63 per share. CSG shares were up 18 per cent at 74¢ by Wednesday lunchtime following news of the sale. CSG . However, it did not proceed with either bid as according to CSG secretary, Jim Clark, the transactions were not in the best interest of shareholders.

CSG to Restructure Print Business

CSG has also announced that, following a detailed strategic review, the operations of the Print Services Division comprising Print Services Australia and Print Services New Zealand, will be restructured to improve efficiency and to reduce costs.

The full restructure is expected to be delivered in two phases. The first phase of this restructure is expected to deliver annualised cost savings of $13 million by September 2012. The second phase, to be implemented by June 2013, is expected to deliver further cost savings in excess of $4 million per annum.

Cash restructuring costs are anticipated to be $7 million in total, including $5 million to be incurred prior to 30 June 2012.

CSG is also planning to establish an in-house, equipment leasing capability in the second half of the 2013 financial year, which will benefit its Australian customers.

CSG Outlook for FY12

CSG has advised that, whilst the performance of the New Zealand Print Services business and the Technology Solutions business remain in line with the Company’s forecasts, there has been a further deterioration in the financial performance of the Australian Print Services business.

The Company now expects that FY12 EBITDA, before abnormal items, may be approximately 30% lower than FY11 EBITDA. The final result will depend on a number of factors, including: the potential signing of new customer contracts; the timing for installation of large print contracts; and the achievement of the expected savings from the Print restructure.

In addition, the Board will be reassessing the book carrying value of the Australian Print Services business, including any impairment charges.

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