Outsourcing group Xchanging has soared 50% after receiving takeover offers from both Capita and private equity firm Apollo Global Management.
The company, which runs invoice processing and claims settlement for the insurance sector and was the inaugural sponsor of the university boat race, said it had been in talks with Capita since 11 August, with an initial bid of 140p a share in cash raised to 160p. Capita plans to fund any deal with a placing of new shares.
Separately Apollo has offered 170p a share, with both sides being granted due diligence.
At the higher price, Xchanging is valued at around £420m and its shares have jumped 55.25p to 166p on news of the bidding war.
The offers come just weeks after the company said its procurement division had seen a poor first half, and its chief executive would leave. Analyst Robin Speakman at Shore Capital said:
We cannot discount the emergence of a yet higher offer from another party, perhaps a peer in global financial services support seeking additional synergies or indeed a higher offer from either Capita or Apollo; thus we believe that Xchanging is now firmly in play.
Capita would likely make a good home, in our view, for Xchanging, though we believe that the company would have to at least match Apollo’s offer of 170p.
We view this as a potential strategic deal for Capita, rather than a bolt on at a significant valuation discount to its own. Xchanging’s business is rooted in the UK, but looks to global opportunities; for example, we believe that Xchanging’s ‘technology campus’ in India may offer Capita an additional development and support resource to drive future organic growth – this having been in short supply for Capita in recent years, in our view. Financing this transaction with additional debt of around £500m may be an initial stretch for Capita, but the additional EBITDA and synergies are likely to see ratios remain in the group’s comfort zone. Capita claim potential synergies of 35m on acquisition from head office and IT efficiencies, we consider this figure to be aggressive on Xchanging’ 2016 revenues of £418m. We await developments.
Analysts at Stifel were less convinced by the move by Capita, up 14p at £12.27. They said:
Our first thoughts is that there are significant risks involved in this possible acquisition. It would be the single largest to date for Capita and would take the company outside of the UK (around 68% Xchanging sales) into new geographies such as the US, South East Asia and Continental Europe. Xchanging is a complex company with complex accounting. We view the possible offer for Xchanging as a departure from management’s stated strategy.
