Capita to buy IBS

Capita is to buy IBS for £77.7m/187.85 per share. As they have already received acceptances for 70% of the equity it is in effect a 'done deal'. Given that IBS had cash of £12.7m (at 31st Dec 07) and the excellent 40% profit margins IBS has achieved, the price Capita is paying looks pretty fair and reasonable.

Background
IBS provides products and services to the UK local government and social housing sectors with four main product sets: OpenHousing, OpenFinancials, OpenRevenues and OpenContractor.

Until 2007, IBS had performed strongly with double-digit growth and good positive cashflow. This was reflected in the share price which hit 200p in July 07. However, in Jan 08, IBS put out what was effectively a profits warning which caused the share price to slump from 165p to 111p. So today's bid of 187p doesn't even put IBS back to its 2007 position.

Results to 31st Dec 07 showed PBT up 6% at £7.6m on revenues also up 6% at £19.8m; generating £6.3m operating cash to achieve £12.7m in nett cash at the 31st Dec 07 year end..

Viewpoint
SITS revenues from the UK local government marketplace are "tightening" as IBS admitted.

But although not growing at the double digit rate experienced of late, it is still growing faster than the UK SITS marketplace as a whole.

IBS, of course, has a niche focus – where it has “a well respected product set”. As we know well, good companies in niche markets can buck general market trends.

IBS has two main ‘niches”

Revenue and Benefits – I think this market will be very tough. There were only two significant new tender situations in 2007. So IBS is going to experience great competition for any new installations which come along. On the other hand, IBS makes 70% of its revenues in this area from existing customers upgrading. If a new systems installation is a optional luxury, systems upgrades to existing systems then become a necessity. Indeed, the marketplace might actually favour those (like IBS) with a strong installed base. The supplier is usually the only person able to tender for such work.

Social Housing – IBS won a very healthy 18 new contracts in 2007 with the likes of Sandwell Homes, United Welsh HA, Villages HA, Cadwyn HA, ISOS Group and Aragon HA. It’s a good market and I can’t see any reasons why this niche should be adversely affected. Indeed, economic conditions actually add to the demands for social housing.

IBS competition comes from a range of players which included Capita, Northgate, Anite, Civica (who purchased Comino – a social housing specialist in 2006)

IBS' biggest threat came from the unrelenting move by local authorities towards outsourcing and shared services. To play in that market you have to be big – and the biggest player here (and more generally, the biggest UK BPO player) is Capita! Against IBS’s single-digit growth Capita grew its local authority revenues by an impressive 23% to £345m in its latest FY. – putting it at twice the size of its nearest rival (BT with local authority revenues of c£185m)

IBS didn't play in the outsourcing market and found itself squeezed out as authorities combined workloads and move to Tier 1 suppliers. This would be especially true in the Revenue and Benefits area – less so in Housing.

However, this can bring opportunities too. The supplier landscape to the local authority marketplace is consolidating. Anite’s local authority business (indeed the whole of Anite) is ‘For sale’. Northgate (which had flat revenues of c£116m from the local authority market in 2007) has been purchased by KKR. HBS and Vertex (both in the Local Govt Top Ten) are also ‘under new ownership’. Comino (the most direct competitor in the social housing market) was bought by Civica in 2006.

Conclusion
I have long thought that IBS was "a healthy little company". It’s prospects in social housing were good although it faced a tough market in Revenue and Benefits.

However, it lacked any scale and being mid-sized in a consolidating market was becoming uncomfortable.

The deal with Capita was entirely what I expected. It makes huge sense for both parties and goes on Holway's "this is a sensible M&A deal" pile. Mind you most of Capita's deals get put on that pile. See my "Dullness is an Asset" at Capita - posted yesterday.