British listed mainframe computer specialist Micro Focus has announced its intention to buy privately-owned US rival The Attachmate Group for US$1.2 billion (A$1.3 billion), a deal which is expected to result in a new entity that will relist on the London stock exchange.
The all-share deal values the firms' combined capital and debt at US$2.35 billion.
Micro Focus today said that following the reverse takeover, its shareholders would own about 60 percent of the equity in the new group.
The two groups serve major corporate clients such as banks, retailers and airlines that run mainframe computers, helping them modernise the technology so applications and databases can be accessed by newer systems.
"We aim to help customers sort out some of the challenges of their older IT systems and link them to new technology, so they can get more return on their current investments," Micro Focus executive chairman Kevin Loosemore said.
"This gives us a broader set of products to deliver that, and it also exposes us to some faster growing markets."
Loosemore said Micro Focus had been talking on and off with The Attachmate Group for about three years before finally agreeing a deal.
The owners of Attachmate include the Francisco Partners Funds, the Golden Gate Funds, the Thoma Bravo Funds and the Elliott Management Fund.
Loosemore, who retains his position in the combined group, said the deal would lift Micro Focus's revenue to about US$1.4 billion from about US$430 million, and its underlying core earnings to more than US$500 million from US$196 million.
He said Micro Focus was buying Attachmate for about 7.5 times core earnings, a significant discount on the 11.3 times earnings Micro Focus trades at.
Shares in Micro Focus jumped to an all time high of 935 pence, up 11 percent, following the announcement of the deal.
Analyst George O'Connor at Panmure Gordon, who has a "buy" rating on the shares, said the deal was a big step towards Micro Focus becoming an "all applications modernisation company".
"The acquisition has the same DNA - it is a large systems enterprise software company, with high profitability and is cash generative," he said.
The two companies' net debt, comprising US$233 million on the part of the British company and US$1.17 billion on the part of Attachment, will be refinanced as part of the deal, Loosemore said.
The combined group's debt ratio would increase to about 3.3 earnings, but this would be reduced to Micro Focus's long-term debt target of 2.5 times in about two years, he said.