ITnet has announced that it is in preliminary takeover talks.
The name of the potential suitor has not been disclosed, although possible candidates include UK government contractor Capita Group and US services giants Computer Sciences and Hewlett-Packard, all of which would be keen to increase their business with UK government agencies, which account for more than half of ITnet’s revenue. ITnet’s UK rivals Xansa and LogicaCMG are not thought to be in a position to launch a takeover bid, with the latter currently aiming to acquire the IT services arm of Portuguese utility company EDP.
ITnet has been weakened this year by the loss of its largest contract, an GBP83 million data center hosting deal with the UK Cabinet Office that was cancelled in June. The loss of the deal hit ITnet’s financial results in the six months ending June 30, 2004 in the form of a GBP24.4 million exceptional charge. Despite 15% revenue growth, the company reported a net loss of GBP12 million compared to a profit of GBP5.5 million in the year-ago period.
The Cabinet Office charge meant the company’s cash resources shrank to GBP300,000 at the end of June from GBP18.3 million at the end of December 2003, which has significantly impaired its ability to expand through large contract bids and M&A activity in the short term.
ITnet nevertheless ranks as one of the largest providers of infrastructure outsourcing services to UK local government agencies. In September it announced a GBP6 million contract extension with Birmingham City Council. ITnet’s public sector revenue grew 18% to GBP59.8 million in the first half of 2004, representing 57% of sales, with the remaining 43% coming from the commercial sector.
Overall, ITnet’s general financial health is good and it occupies a strong position in several vertical markets where it competes for second- and third-tier infrastructure and applications outsourcing deals. The company’s forward order book stood at GBP296 million at the end of June, and its operating profit margin for the first half of the year was 7.7%, a relatively strong level for an infrastructure services vendor.
