Xchanging recommends 160p per share offer from Capita

Outsourcing group Capita said the board of peer Xchanging has recommended its 160p per share offer, which values the company at around £412m, although Xchanging is still in discussions with Apollo Global Management.

The deal, which is expected to be immediately earnings-accretive for Capita, represents a premium of 44% to Xchanging’s closing price of 111p on 2 October, which was the last business day prior to the commencement of the offer period.

Xchanging's senior independent non-executive director, Ian McCormack, said: "The terms of the offer, which represent a significant premium of 52% to the three month average price and 64% to the one month average price, provides certainty, in cash, to Xchanging shareholders today."

Earlier on in the month, Xchanging had confirmed that it was subject to two bid approaches, one from Capita and one from private equity group Apollo Global Management.

Capita said the offer is final, although it has reserved the right to increase the price per Xchanging share in the event that a third party announces a firm intention to make an offer.

Capita said the acquisition was consistent with its stated strategy of acquiring businesses that build capability in existing operations, allow the company to enter new attractive industry segments and enhance its future organic growth potential.

In addition, it would enable Capita to secure at least £35m in cost synergy benefits driven by head office, shared services and IT efficiencies in full-year 2017, at a cost of around £20m in the first 12 months after acquisition.

The cash consideration payable pursuant will be financed initially through a bridging loan facility and Capita said it intends to use the proceeds from a placing of new shares to refinance the agreement.

Capita’s chairman, Martin Bolland, said: “We are excited by Xchanging's prospects and will build its skills and capabilities to provide a platform for enhanced organic growth for Xchanging. We believe this acquisition will create significant value for our shareholders and drive long term returns, with the businesses benefitting from a number of efficiencies and cost savings.”

Separately, Xchanging released a statement confirming that discussions with private equity group Apollo are continuing with regard to a potential offer at 170p per share in cash.

It added that there can be no certainty that any offer from Apollo will be made, nor as to the terms of any such offer.

Whitman Howard said that strategically, there are few doubts that Xchanging is a good fit with Capita.

“Clearly the numbers point to this being a good deal for Capita as it is buying a good operation it knows well for around 6.5x prospective operating profit. Our main concern is around Capita’s capacity to integrate fully this new operation alongside other acquisitions, especially Avocis.”

The broker added that this is “a good earnings enhancing deal and it should get support when the equity fund raising happens in due course, assuming Apollo doess not play a trump card and /or another bidder emerges”.

At 0930 BST, Capita shares were up 0.2% at 1,256p while Xchanging was 0.8% higher at 165.25p.