PFSI007

CGI GROUP INC.

Robert W. White prepared this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

. Copyright 2006. Version: 2007-07-09

CGI Group Inc.s (CGI) chief executive officer, Serge Godin, cited the companys 1998 decision to merge with BCE Inc.s (BCE) subsidiary, Bell Sygma, as the moment it became what he called a credible player in the large outsourcing market. In December 2005 BCE was CGIs single largest customer and shareholder with 128 million shares or 30% of the companys issued and outstanding common shares. Combined revenues attributable to contracts from the BCE family of companies decreased from 14.3% of CGIs 2005 total revenue, compared with 16.4% in 2004 and 19.3% in 2003. CGIs top five clients represented 26.5% of total revenues in 2005, compared with 31.5% in 2004 and 35.1% in 2003 (see Exhibit 1 for summary financial statements). CGI provided end-to-end IT and business process services to clients worldwide from offices in Canada, the United States, Europe, and Asia Pacific as well from centers of excellence in the United States, Europe, India and Canada. On February 1, 2005, CGI announced that the Board of Directors had authorized the purchase of up to 10% of the public float of the Companys Class A subordinate shares during the next year through a Normal Course Issuer Bid (see Exhibit 2 for a description of issuer bids). The Company received approval from the Toronto Stock Exchange for its intentions to make an issuer bid. The issuer bid enabled CGI to purchase on the open market, through the facilities of the Toronto Stock Exchange, up to 27,834,417 Class A subordinate shares for cancellation. The total Class A subordinate shares repurchased during fiscal 2005

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was 14,896,200, at an average price plus commission of $7.82, for an aggregate consideration of $116.4 million. On December 16, 2005 CGI Group Inc. (CGI) announced a 100 million share buyback and cancellation of 78% of the 30% BCE stake in CGI for C$859.2 million to be financed through cash and credit facilities. This transaction will reduce the total number of CGI shares outstanding to an estimated 330.6 million after the repurchase of 100 million shares (also including some other shares repurchased under the companys normal course issuer bid). Executive managements ownership of 38.8 million Class B (unlisted class of shares) and 1 million Class A (listed on the Toronto Stock Exchange and the New York Stock Exchange) shares will represent 10.5% of the companys equity and 53.4% of the vote (up from approximately 8% and 46%, respectively). The shares outstanding are always reduced by the number of shares repurchased because a firm cannot own itself. In this case, they were to be cancelled. The sale marked BCEs (Canadas largest telecommunications company) latest move to shed non-core assets as the company, parent of Bell Canada, focused on its core telecommunications operations. The company said that it planed to sell the rest of its CGI shares 120 days after the CGI deal closed, which was expected to occur on January 12, 2006. Assuming 100 million shares are repurchased, BCEs remaining 28.3 million stub would represent one sixth of the annual share turnover or 10 weeks of average trading volume. BCE said it and CGI agreed that their ongoing relationship could be secured through commercial relationships. BCE said that CGI would remain the preferred IT-services supplier until June 2016 to the Bell family of companies and CGIs agreement to outsource its Canadian communications network management requirements to BCE will similarly be extended. An issuer making a substantial issuer bid for voting or equity securities through the facilities of the Toronto Stock Exchange (Exchange) shall file a notice with the Exchange in accordance with Rule 6-203. In addition, unless a waiver is obtained from the Director or the Commission, a valuation of the target company must be prepared in accordance with s. 182 of the Regulation under the Securities Act. The purpose of the evaluation of CGI is to determine if the proposed acquisition price of $8.60 (volume weighted average of CGIs trading price over the prior 20 days) for the BCE block is fair considering the fundamental value of the company. In December 2005 CGI shares had been trading below their two year high of $9.29 (February 3, 2004), in line with its 50 day moving average of $8.51, but well above its 200 day moving average of $7.83 (see Exhibits 3 and 4 for stock price performance) Driven by its strong financial performance, but mainly due to an aggressive buyback program, CGIs shares have been trading in the $8.50 range

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and have outperformed the S&P/TSX IT sub index1 which has been under pressure. CGIs stock has performed at the top of its peer group over the past 24 months with a return of 12.5 % (as of December 13, 2005). What is the potential impact of the buy back on CGIs growth potential? What are the approaches and operational issues in deriving a fair value? Is the issuer bid price fair? What are the implications of the source of funds for the repurchase? What was CGIs December 2006 target price?
CGI GROUP INC.

Founded in 1976, CGI had grown through acquisitions and organic growth to become, in December 2005, the 8th largest independent IT services company in the world (by line of business IT Services and Business Process Services accounted for 88% and 12% of CGIs 2005 sales, respectively). In 1986 CGI entered the U.S., the biggest IT services market in the world, and made its first major acquisition there in 1999, when it bought Deloitte and Touches IT business, DRT Systems International. Since 1986, CGI had acquired more than 20 companies. On January 30, 2004, CGI announced that it had completed a US$192 million private debt placement financing with U.S. institutional investors. The private placement was comprised of three tranches of guaranteed senior unsecured notes, with a weighted average maturity of 6.4 years and a weighted average fixed coupon of 4.97%. The proceeds were used to reimburse the drawn-down portion of the Companys existing credit facilities, as well as for general corporate purposes. The Company had a five-year unsecured committed revolving term credit facility (expiring in December 2009) for an amount of $800,000,000 to cover operating activity needs, working capital purposes and the financing of acquisitions and outsourcing contracts. In addition to this revolving credit facility, the Company had available demand lines of credit of $27,000,000 and 2,000,000. The credit facilities included covenants which required the Company to maintain certain financial ratios. As of September 30, 2005, these ratios were met and an amount of $786.7 million was available under this agreement. CGIs financial strategy was to use cash to make acquisitions and to keep its leverage under 20% of its overall capitalization. Godin estimated that the current cost of borrowing under the facilities would be 5% - 5% plus. Despite reporting 2005 fiscal year net earnings of $216.5 million, up 18.5% compared with fiscal 2004, several analysts were wondering why CGI was not hell-bent on acquiring more rivals to insulate itself from its larger competitors. International Business machines (IBM) and Electronic Data Systems Corp. (EDS) each had $10 billion in revenue in 2005, three times as much as CGI. The implication in the financial analysts remarks was that unless it bulks up, CGI
CGI represents 4.72% of the S&P IT sub index. Other members of the index are Aasra Tech, ATI, Celestica, Cognos, Emergis, Geac, Hummingbird, MDA ltd, Nortel, Onex, Open Text and RIM.
1

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wouldnt be mentioned in the same breath as outsourcing firms with more of a global scale. CGI generally worked on three to four merger and acquisition opportunities at any one time and had about ten others it was considering from a distance. It also returned to old acquisition ideas after it had abandoned them For example, the company had discussed a potential transaction with AMS for six years before a deal was finally stuck. The merged AMS and CGI operations, increased the number of CGI professionals to 25,000 and doubled its footprint in the U.S. and Europe. The problem was not so much what CGI was doing but what its peers in the market were doing. IBM, for example, was accused of continuing to develop technology products only so that it could feed its Global Services business. That may have been true, but in many cases they were really great, innovative products that give Big Blue the expertise that attracted customers to its consultants for advice. While some clients might see IBM as too big and too broad, other IT firms in the market were diversifying to meet niche requirements. Thats part of the reason why A.T. Kearny decided to buy out EDSs stake and spin off as a standalone entity. EDS had the advantage, however, of maintaining a close, potentially symbiotic relationship with A.T. Kearny that might make it appear to have more resources than CGI. Compared to these two, CGI could seem a little too broad but not really that big. On the other hand, CGI had not demonstrated a lot of innovation around business process outsourcing, whereas specialty shops like ADP were introducing services such as an electronic way to manage record of employment requests. Prudence had been Godins watchword, and he had 30 years of success to back him up. With fewer players left, it may be time for CGI to take a few calculated risks that would set it apart from other me-too outsourcing juggernauts. CGIs 2006-2008 business plan reaffirms its successful four pillar growth strategy, with CGI a consolidator in its industry through a balance of organic and external growth (see Table 1 for internal versus external growth of CGIs revenue). While CGI already had critical mass in its main areas of operation, its strategy was to continue to increase its presence through acquisitions in selected metro markets where it sees the greatest potential to drive organic growth. On October 4th, 2005, CGI-AMS Inc., the wholly-owned U.S. operating subsidiary of CGI Group Inc., began exclusively negotiating with The Commonwealth of Virginia to be its private sector partner for a sweeping initiative to transform the states business and information technology program. RBC Capital Markets speculated that the contract could be worth C$1B - $2B to CGI over 10 years. The

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initial value for the seven-year contract for CGI-AMS was expected to be up to US$300 million with two optional three-year renewal periods. RBC Capital Markets was expecting details of the final negotiations to emerge in calendar Q1/06 or earlier. While this development was positive, pending additional information on the contract terms it did not change RBC Capital Markets current thesis, given the contract represents 2% - 5% of CGIs expected consensus F06 revenues. It was also possible the contracts EBIT margins may be below CGIs current 9% - 10% margins, given CGI-AMS considered winning the bid as critical to its U.S. strategy, and the contract appeared to require the winning bidder to make significant upfront hiring and ongoing funding commitments. At current valuation (March 2006) of $100-$200M/year and EBIT margins of 6% - 7%, this may represent $0.01 - $0.02 per year impact on EPS or at a P/E of 15, $0.15 $0.30/share upside to valuation. Citigroups assessment is that CGIs P/E should be at the low end for the range for the industry. We (Citigroup) feel that this is appropriate given that the organic growth rate has not recovered and that the outlook for growth in the overall outsourcing industry is not impressive.2
Table 1 CGI GROUP INC. COMPARISON OF OPERATING RESULTS FOR FISCAL YEARS 2005, 2004 AND 2003REVENUE (in C$000s except percentages)

Years ended September 30 Revenue Internal Growth (1) External Growth (2) Growth prior to foreign currency impact Foreign currency impact Growth over previous year Notes: 1.

2005 3,685986 2.2% 18.3% 20.5% (3.5%) 17.0%

2004 3,150,070 2.5% 21.3% 23.8% (2.2%) 21.6%

2003 2,589,905 3.8% 24.3% 24.3% (0.9%) 23.4%

2.

Internal growth relates to the growth of CGI revenue from existing contracts as well as new contracts for systems integration and consulting and outsourcing services. It is calculated as total revenue less the revenue run-rate from acquired companies as at the transaction date, and adjusted for the impact from the fluctuations of foreign currencies against the Canadian dollar. External growth relates to the growth of our revenue from acquisitions.

Citigroup Global Markets, Small/Mid-Cap Research, CGI Group Inc. December 21, 2005.

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INDUSTRY OUTLOOK

Most of the recent studies and surveys conducted by research firms show that a larger proportion of corporations than ever before will increase their information technology spending over the coming quarters, a trend which is good news for systems integration and consulting practices. In addition, the outsourcing outlook for both IT and business services remained strong. Demand for systems integration and consulting services (SI&C) in North America was expected to grow by approximately 4% to 5% annually, according to industry analysts. Demand growth for IT and business process services outsourcing was projected to be stronger. In a study commissioned by CGI, market research firm IDC found that IT spending not yet outsourced by organizations amounts to US$60 billion a year in Canada, US$682 billion a year in U.S. and US$476 billion a year in Western Europe. Regarding business process services, IDC found that the annual spending not yet outsourced amounts to US$80 billion a year in Canada, US$1.5 trillion in the U.S. and US$480 billion in Western Europe. This was one estimate of the market potential, a portion of which would be outsourced over the coming years.
VALUATION OF CGI GROUP INC.

In general, the object of the valuation exercise is to determine the fair value of an item that is not traded, i.e. if it were sold, what would be its fair price? The current price of an item is the capitalized value of the stream of benefits that are expected to accrue from ownership. Conceptually this involves projecting out the expected net benefits for the life of the item and then discounting back for time and risk to arrive at a figure of merit or price. These prices are what are observed as the outcome of auction processes on stock exchanges and in bids for securities/companies. These prices reflect available information and change with the receipt of new information. The commonly used approaches to arrive at a value are comparables, discounted cash flow (DCF) and street consensus.
Comparables Approaches

A reasonable starting point is to use inputs that are determined in a competitive market, i.e., are known and not hypothetical or theoretical. The most recent traded price of a security is a factual number. Investors committed funds in the transaction. In order to arrive at comparable numbers it is necessary to standardize or normalize the market prices. One method is to use observable values, such as numbers from audited financial statements. This leads to a dominate valuation approach that is based on trading multiples of comparables. In the comparable companies or comparable transaction approach, key relationships are calculated for

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a group of similar companies involved in the deal. This approach is widely used, especially by investment banks and legal cases. In the U.S., for example, the valuations included in a prospectus, cannot contain forecasts (estimates). In Canada it is permitted to use forecasts but with restrictions such as being audited; approximately 95% of Canadian prospectuses do not contain forecasts. The underlying premise is that investors will pay what they perceive it to be worth given current market conditions. It is a commonsense approach that says that similar securities should sell for similar prices. This straight forward approach appeals to businesspersons, to their financial advisors and the judges in courts of law called upon to give decisions on the relative values of companies in litigations. A comparables table contains several valuation metrics and characteristics of companies/securities that are similar. To test for comparability an analyst examines the values of the prime variables that explain the structure of the valuation metric: growth potential, business risk, financial risk, and margins. One way to control business risk is to select securities for companies in the same line of business. A practical approach is to select companies with the same Standard Industry Classification (SIC) codes or the revised version called North American Standard Information (NAICS) codes3. Many firms have been assigned multiple industry codes. The classification codes for individual companies are included in most corporate financial information data bases such as Standard & Poors COMPUSTAT, Corporate Retriever Micromedia ProQuest and Center for Research in Security Prices (CRSP). Corporate financial data can differ across firms due to differences in accounting procedures. In the process of creating commercial databases the data is standardized, thus reducing the impact of these differences. Analysts forecasts of sales, earnings, growth rates, etc. are routinely gathered, processed (consensus estimates) and published in commercial data bases by such firms as Thomson First Call and IBES. In sum, the starting point of the valuation is the market value of a security divided by or normalized by variables such as revenue, earnings, cash flow or book value. The comparables table, created by Progressive Financial Group Inc. (PFG), is presented in Exhibit 5 (see Exhibit 6 for precedent transactions). The specific comparables selected are, in part, a function of the analyst. RBC Capital Markets selected six companies: Accenture, BearingPoint, Computer Sciences, Electronic Data Systems, Perot Systems and Sapient4; and National Bank Financial selected: Accenture, Affiliated Computer Services, Computer Sciences Corp., Keane, Perot Systems and Ciber5. Another
Canadian source of industry classification codes: http://www.statcan.ca/english/concepts/industry.htm. U.S. source of industry classification codes: U.S. Census Bureau, http://www.census.gov/epcd/www/naicstab.htm. 4 Mike Abramsky, Ranjit Narayanan, and Paul Treiber, RBC Capital Markets, CGI Group Inc., Research Comment, December 19, 2005. 5 Richard Tse and Dean McPherson, National Bank Financial, The NBF Daily Bulletin, IT Consulting & Services, December 18, 2005.
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complication is that fiscal year-ends differ across firms (although they tend to be the same for firms in a given industry). In this case CGIs year-end is in September, whereas the year-end of most of the comparables is December. The data in Exhibit 5 column labels CY are for calendar years. Enterprise Value (EV) is the market value of the companys earning assets and is equal to the market value of long-term liabilities. From the following equation one can see there are two distinct ways to arrive at EV or what is often the object of the analysis, the Market Capitalization of Common Equity (S): Enterprise Value = Market Capitalization of Common Equity + Long-term Debt (Cash + Cash Equivalents) + Minority Interest + Capital Leases + Preferred Stock Assume that the companies listed in Exhibit 5 satisfy most of the compatibility requirements. The next step is to calculate the ratios of market value to selected operating metrics, for example: revenues, earnings, cash flows and book value. EV or S is derived by applying the multiplier to the absolute data for the company. This is a method of predicting what a companys publicly traded price is likely to be. Which comparable company to use? If there is no or little variation in the ratios, then an argument can be made to use the average of ratios. The taking of averages tends to reduce the impact of measurement errors. If they are greatly different, which implies that the dispersion around the average is substantial, the average (a measure of central tendency) is not meaningful. In other words there are significant differences in the operating characteristics of the firms, for example, growth potential, margins, and financial leverage. In this case it is important to select the comparables that exhibit the operating characteristics which are most descriptive of the target company. In either case the comparable ratio is then adjusted to reflect any differences in operating characteristics, for example, if the target company has higher margins then the comparable ratio will adjusted upward. The magnitude of the adjustment is generally based on experience. EV can be valued directly by using metrics based on total earnings power, for example: revenue, earnings before interest and taxes (EBIT) or operating cash flows (EBITDA). The alternative is to derive the market value of each component on the right hand side of the equation. The sum of these components is EV. Net Debt is generally defined in the industry as Long-term Debt less (Cash plus Cash Equivalents). Similarly, S can either be calculated directly using earnings available to common equity, cash flows available to common equity (generally defined to be net income less dividends plus depreciation and amortization) or book value. Which valuation metric to use, for example, EV/EBIT or P/E, is driven by data availability, stability of margins, differences in capital structure and also by convention. Trust units, financial institutions, regulated utilities are examples of industries where the convention is to value equity directly. If the

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capital structure of the comparable differs significantly from the comparable and/or is changing, then instead of valuing equity directly value EV and back out the value of equity. Industries/companies with high non-cash expenses are typically valued using cash flow metrics. The more unstable the margins the higher up the income statement you go, i.e. from EV/EBIT to EV/EBITDA to EV/SALES. This results in reduced precision because cost structures are not being directly accounted for.
Discounted Cash Flow Approach for Enterprise Value

Another dominate valuation technique is called the Discounted Cash Flow (DCF) model in which expected free cash flows are discounted back using a weighted average after-tax cost of capital (k). A critical issue in the application of the theory is the ability to obtain quality inputs; which in turn generate specification issues. Unlike the comparables approach in which growth, margins and risk were implied by the magnitude of the multiplier, the DCF approach attempts to explicitly quantify them. In the generic 2-stage DFC model, enterprise value is calculated by discounting the free cash flows over the period characterized by unstable change and adding a terminal value at the end the period that capitalizes the future growth of the free cash flows (once stable) using, for example, an exit multiple or infinite growth model. Free cash flows are defined to be: FCFt = EBITt Less Tax Exposuret (EBITt * Tax Rate) Plus Depreciation and Amortizationt (Non-Cash Expenses) Less Increases in Operating Working Capitalt Less Capital Expenditurest Where: Operating Working Capitalt = Cash Transaction Balancest + ARt + Inventoryt + Other Operating Current Assetst APt - Taxes Payablet - Other Operating Current Liabilitiest The infinite growth model for estimating the companys terminal value (TV) at the end of period T is: TVT = FCFT * (1 + g) /(k g) Where: g = perpetual growth rate of free cash flows once stability is achieved, and k = after-tax weighted average cost of capital. The exit model for estimating the companys terminal value (TV) implicitly assumes that the firm will be sold at the end of period T. Thus, TV is arrived at by using an EV/EBITDA or EV/EBIT trading multiplier, namely: TVT = (EV/EBITDA)T * EBITDAT+1

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EV = Present Value = FCFt / (1+k)t + TVT / (1+k)T

t=1

This generic DCF model critically assumes that the business risk and debt capacity (target capital structure) of the company are constant across time. PFGs DCF analysis of CGI takes into account the following assumptions: 1. No significant acquisition in forecast period. 2. The Company will incur a large contract acquisition costs in 2006. 3. The Company will cancel its Normal Course Issuer Bid (NCIB) program. They forecast CGIs 2006 revenues of $4,160 million or an increase of 12.85% over fiscal 2005 revenues. They estimated that the growth rate in revenues would decline to 10% by 2010 (see Exhibit 7 for summary DCF analysis). CIBC World Markets assumed revenue growth rate of 5% throughout the forecast period through F20116 for CGI. PFG assumed a terminal perpetual growth of 3.5% (sensitivity range of 3.0% to 4.5%) and an EBITDA exit multiple of 5.5 (sensitivity range of 4.0 and 6.5). CIBC World Markets assumed an exit EBITDA multiple of 5.7 Citigroup assumed a terminal perpetual growth rate of 1% to 1.5%.8 RBC Capital Markets assumed a terminal perpetual growth rate of 4.5%.9 In arriving at a cost of capital PFG used an average 5-year adjusted beta of 1.07 (see Table 2 for betas of comparables), a 6% market risk premium and a risk free rate equal to the 10-year Government of Canada rate of 4.12%; a weighted average cost of capital (WACC) of 10.05%. CIBC World Markets used a discount rate of 8% equal to our cost of equity assumption.10 Citigroups estimates for computing a cost of capital were: Risk free rate of 4.21%; Market Risk Premium of 3.8%; Beta of 1.26; A FY06-end net debt position of approximately C$1.27/share; and a WACC of 7.59%.11 RBC Capital Markets assumed a WACC of 9.5% and FY06end cash of $0.62/share.12 Betas are commercially available from a wide variety of sources such as Bloomberg and the Toronto Stock Exchange (TSX). The five-year beta based on a
CIBC World Markets, CGI Group Inc. Equity Research, December 16, 2005. CIBC World Markets, CGI Group Inc. Equity Research, December 16, 2005. 8 Citigroup Global Markets, Small/Mid-Cap Research, CGI Group Inc. December 21, 2005. 9 Mike Abramsky, Ranjit Narayanan, and Paul Treiber, RBC Capital Markets, CGI Group Inc., Research Comment, December 19, 2005. 10 CIBC World Markets, CGI Group Inc. Equity Research, December 16, 2005. 11 Citigroup Global Markets, Small/Mid-Cap Research, CGI Group Inc. December 21, 2005. 12 Mike Abramsky, Ranjit Narayanan, and Paul Treiber, RBC Capital Markets, CGI Group Inc., Research Comment, December 19, 2005.
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regression of monthly data against the S&P/TSE Total Return Index for the period ending November 2005 reported on the TSX CD-ROM products, 2006 edition was 1.391. The corresponding Market Risk Premiums based on data from January 1950 through November 2005 are reported in Table 3.
Table 2 COMPARABLE COMPANY BETAS
Company Accenture ltd. Electronic Data Systems Corp. Computer Sciences Corp. Affiliated Computer Services Unisys Corp. BearingPoint Perot Systems Maximus Keane Ciber Average CGI Group
Source: Progressive Financial Group Inc.

Symbol ACN U.S. EDS U.S. CSC U.S. ACS U.S. UIS U.S. BE U.S. PER U.S. MMS U.S. KEA U.S. CBR U.S.

Market Cap US$22,515 US$12,512 US$10,429 US$7,115 US$1,860 US$1,444 US$1,582 US$836 US$638 US$383

Beta 2-year 5-year 0.90 1.14 1.24 1.22 1.23 1.18 1.09 0.86 1.34 1.24 1.51 1.66 1.21 1.01 1.10 0.88 1.22 1.32 1.38 1.28 1.22 1.18 0.74 1.06

GIB.SV.A CA

C$3,622

Table 3 FINANCIAL MARKET DATA BASED ON MONTHLY DATA January 1950 through November 2005
Geometric Mean 10.666% 5.855% 6.939% 7.109% Arithmetic mean 11.905% 5.924% 7.229% 7.570%

S&P/TSX Total Return Index Short-term Interest Rate (30 day) Medium-Term Interest Rate (7 1/2 Yea Long-term Interest Rate (17 Years)
Source: TSX CD-ROM Products, 2006 edition.

Both PFG and Citigroup implicitly assumed that the Capital Asset Pricing (CAPM) was the appropriate model in computing the cost of equity. Although the

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CAPM is probably the best operational model available there are competing theoretical models and the CAPM has significant short-comings.13
Street Consensus

Analysts Research Reports typically contain forecasts of revenues, earnings per share and P/E for two years into the future (see Exhibit 8). They also indicate a target price usually for 12 months hence which, depending on the analyst is based on average of prices generated by valuation techniques used (RBC CM and Citigroup weighted P/E and DCF prices; CIBC WM only reported using DCF and National Bank only used P/E). PFG believed that analysts would begin valuing CGI based on September 2006s EPS consensus low of $0.53 and high of $0.66 (see Exhibit 9) which would increase the value of CGIs share at least $1.00 in the coming quarters of 2006. By applying the current forward multiple of 17x to an estimated 2006 EPS range of between $0.53 to $0.66, they evaluated CGI share at between $9.01 and $11.22.
Net Asset Value

The 30% of CGI held (as of December 2, 2005) by BCE would appear on BCEs balance sheet as a minority investment. As a conglomerate the valuation of BCE would be done using a sum-of-the-parts approach, i.e. valuing each subsidiary/investment as a stand alone pure play and aggregating as an estimate of enterprise value. BCEs net asset value (NAV) or common equity value is arrived at by subtracting net debt from the enterprise value. The summary of RBC CMs NAV analysis of BCE is presented in Exhibit 10. With respect to the value of CGI the research analyst concluded: Valuation in Line With Expectations. Total proceeds from the sale will amount to roughly $1.1 billion ($1.18/BCE share) consistent with our forward carrying value of $1.15 billion (or ($1.25/BCE share). 14 The NAV (see Exhibit 10) of BCE Inc., as of Dec. 2, 2005, was derived using the following metrics: Bell Canada Wireline Assets @ 4.50x 2006/7E EBITDA. Wireless @ 8.0x 2006/7E EBITDA. ExpressVu @ 15.0x 2006/7E EBITDA. Globemedia @ recent transaction value. Telesat @ 10.0x 2006/7E EBITDA. Other Assets at Market (less a holding company discount of 15% on non-Bell Canada assets).
13

See, for example, Mark Grinblatt and Sheridan Titman, Financial Markets and Corporate Strategy,McGraw-Hill, 2nd edition, 2002, Chapters 5 and 6. 14 RBC CM Research Report on BCE, Dec.19, 2005.

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QUESTIONS: 1. 2. 3. 4. 5. 6. 7. What is a likely explanation as to why CGI only repurchased 100 million of BCEs holding? What the implications of the repurchase for the operating strategy of CGI? Is the repurchase announcement likely to change the fair value of CGI? What is your prediction as to the markets response in terms of a share price for CGI and BCE? The case asserts that the drivers of trading multiples are: growth potential, business risk and margins. Is this correct? The analyst inputs to their DCF analysis differ significantly, yet they arrive at approximately the answer? Why that price? Is there an explanation? What is net asset value? Pure play? Conglomerate discount? Is the issuer bid price fair?

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Exhibit 1 CGI GROUP INC. SUMMARY FINANCIAL STATEMENTS

Fiscal Year Ending Cash, Deposits & Short Term Invest. Accounts Receivable Miscellaneous Receivables Work in Progress Taxes Recoverable Prepaid Expenses Other Current Assets Total Current Assets Property Plant Equipment Leasehold Improvements Accumulated Depreciation Miscellaneous Fixed Assets Total Long Term Investments Deferred Tax Assets Goodwill Intangibles Miscellaneous Assets Total Assets

9/30/2005 9/30/2004 9/30/2003 240,459 200,623 83,509 487,731 545,056 301,430 138,105 214,470 222,278 122,737 22,118 80,814 35,767 74,531 94,617 78,183 41,014 1,040,309 1,143,388 800,745 4,377 25,694 116,388 228,646 580,642 46,601 102,720 22,764 1,773,370 1,827,604 1,385,518 278,240 256,320 200,703 821,743 526,395 3,986,659 4,316,456 3,136,683 147,121 106,052 -114,789 158,043 82,077 -120,873

9/30/2002 9/30/2001 9/30/2000 9/30/1999 9/30/1998 104,221 46,008 49,341 42,229 121,418 229,583 223,158 202,108 204,405 178,991 71,686 62,998 16,830 3,987 5,575 98,904 84,838 56,799 79,899 12,209 12,567 18,977 9,785 53,115 48,931 19,442 13,631 10,716 570,076 4,102 24,724 161,011 45,766 -132,064 484,910 4,191 23,397 142,687 30,572 -101,952 24,496 354,305 344,151 328,909

28,661 29,002 1,133,852 1,118,963 206,493 272,403 264,349 2,306,970 2,028,669

97,146 25,887 -79,649 15,516 1,261 24,470 395,903 40,411 53,305 928,555

61,757 17,914 -28,347 11,770 683 358,787 99,774 866,489

58,668 9,247 -20,548 6,864 621 12,391 288,065 1,874 58,839 744,930

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Exhibit 1 (Continued) CGI GROUP INC. SUMMARY FINANCIAL STATEMENTS

Liabilities (Dollar values in thousands)

Fiscal Year Ending Accounts Payable & Accruals Accruals Taxes Payable Current Portion of Long Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt - Net Deferred Tax Liabilities Deferred Revenues Other Non-Current Liabilities Total Liabilities Minority Interst (liability) Other Liabilities

9/30/2005 9/30/2004 9/30/2003 9/30/2002 9/30/2001 9/30/2000 9/30/1999 9/30/1998 378,692 433,415 289,556 171,352 295,092 142,754 204,397 213,912 107,014 118,541 110,398 93,806 79,119 99,972 66,168 37,507 21,013 7,963 15,708 34,167 13,653 14,529 20,555 4,172 7,528 5,770 5,139 5,561 129,196 123,213 86,616 61,027 50,652 33,194 21,351 11,313 707,672 789,670 573,293 367,864 374,285 189,681 246,595 264,953 234,042 475,291 247,431 4,328 32,752 37,644 54,625 5,730 348,793 287,433 140,571 93,696 43,705 23,929 2,214 61,467 74,813 201,462 301,393 195,178 1,491,969 1,853,787 1,156,473 527,355 525,555 251,254 303,434 270,683 -231,128

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Exhibit 1(Continued) CGI GROUP INC. SUMMARY FINANCIAL STATEMENTS

Equity Fiscal Year Ending Investment & Foreign Exch. Reserves Common Stock Miscellaneous Capital Stock Contributed Surplus Retained Earnings/Deficit Other Shareholders' Equity Total Shareholders' Equity Revenue Fiscal Year Ending Sales/Revenue Total Operating Expenses Interest Income Depreciation & Amortization Interest Expense Net Income before Tax Net Income after Tax Net Income Weighted-average number of Class A subordinate and Class B shares

(Dollar values in thousands) 9/30/2005 9/30/2004 9/30/2003 -158,659 -89,502 1,762,973 1,820,230 1,480,631 6,693 5,870 769,421 555,310 24,984 27,901 2,494,690 2,462,669 1,980,210 (Dollar values in thousands) 9/30/2005 9/30/2004 9/30/2003 3,685,986 3,243,612 2,684,816 3,161,679 2,743,750 2,266,547 8,728 3,094 166,469 164,451 121,133 24,014 20,675 12,578 333,824 323,464 287,652 219,698 210,322 174,383 216,488 219,600 177,366
439,349,210 419,510,503 395,191,927

67,578 895,267

9/30/2002 9/30/2001 9/30/2000 9/30/1999 9/30/1998 34,266 23,761 2,127 1,332,621 1,198,096 491,807 423,764 418,772 31,132 3,652 211 211 211 211 377,944 245,945 183,156 139,080 55,264 35,101 1,779,615 1,503,114 677,301 563,055 474,247

9/30/2002 9/30/2001 9/30/2000 9/30/1999 9/30/1998 2,169,613 1,560,391 1,423,080 1,409,458 740,963 1,860,463 1,341,045 1,254,861 1,195,181 639,596 2,833 2,664 3,624 5,310 1,987 77,005 94,582 67,531 64,875 38,711 2,411 4,206 3,768 1,509 923 232,567 162,082 123,463 169,787 63,720 135,799 89,917 73,478 99,844 34,531 135,799 62,789 55,666 83,816 34,828
377,349,472 299,500,350 270,442,354 267,969,082 117,307,162

Source: Company Financial Reports for 2005 and micromedia.ca for 1998 through 2004.

Page 17

Exhibit 2 ISSUER BIDS THROUGH THE FACILITIES OF THE TORONTO STOCK EXCHANGE

issuer bid means an offer to acquire listed securities made by or on behalf of a listed company for securities issued by that company.15 normal course issuer bid (NCIB) means an issuer bid where the purchases (other than purchases by way of a substantial issuer bid): a) do not, when aggregated with the total of all other purchases in the preceding 30 days, whether through the facilities of a stock exchange or otherwise, aggregate more than 2% of the securities of that class outstanding on the date of acceptance of the notice of the normal course issuer by the Exchange; and b) over the a 12-month period, commencing on the date specified in the notice of the normal course issuer bid, do not exceed the greater of a. 10% of the public float, or b. 5% of such class of securities issued and outstanding, excluding any held by or on behalf of the issuer on the date of acceptance of the notice of normal course issuer bid by the Exchange, whether such purchases are made through the facilities of a stock exchange or otherwise. substantial issuer bid (SIB) means an issuer bid, other that a normal course issuer bid, made through the facilities of the Exchange.

15

Appendix F, Take-over bids and issuer bids through the facilities of the Toronto Stock Exchange, Sec. 6-101 1450-102, TSX Company Manual.

Page 18

Exhibit 3 CGI GROUP INC.1 STOCK PERFORMANCE VERSUS INDEX2

CI G 10.00 9.50 9.00 Prix (C $) 8.50 8.00 7.50 7.00 6.50 6.00 J an-04 Volume (m)

S &P/TS Info tech Index X 400 350 300 250 200 150 Dec-05

Apr-04

J ul-04

Nov-04

Feb-05

May-05

Aug-05

4 2 0

Notes: 1. 2. 3. At end point CGI is top line S&P/TSX Infotech Index bottom line. CGI represents 4.72% of the S&P IT sub index. Other members of the index are Aasra Tech, ATI, Celestica, Cognos, Emergis, Geac, Hummingbird, MDA ltd, Nortel, Onex, Open Text & RIM. Volume on the NYSE for CGI was left out considering it only amounts to 6.79% of the volume of CGI s shares.

Page 19

Exhibit 4 CGI GROUP INC. STOCK PERFORMANCE VERSUS COMPARABLES BY TICKER SYMBOLS LISTED ON U.S. STOCK EXCHNAGES1

140 120 100 80 60 40 20 Nov-03

Feb-04

May-04

Aug-04

Nov-04

Feb-05

May-05

Aug-05

Nov-05

AC USE N quity
Note: 1.

E USE DS quity

AC USE S quity

UISUSE quity

BE USE quity

MMSUSE quity

KE USE A quity

G V/A IB/S

At end point of graph, CGI (ticker GIB.A) is the top line second is ACS, third is MMS, fourth is EDS, fifth is EDS, fifth is ACN, sixth is BE, seventh is KEA and eighth is UIS (by ticker symbols on US stock exchanges).

Page 20

Exhibit 5 COMPARABLES TABLE

(Millions of $, except per share data) American Comparables (US$) Accenture Ltd. Electronic Data Systems Corp. Computer Sciences Corp. (1) Affiliated Computer Services Unisys Corp. BearingPoint Perot Systems Maximus Keane Ciber Average Average (Exclude high/low) European Comparables (2) Cap Gemini Atos Origin Indra Tietoenator Oyj Logica CMG Average Total Average Average (Exclude high/low) CGI Group Inc. (C$) (4) (1) Proforma Dynacorp Divestiture. (2) Valuation multiples exclude extraordinary items as well as goodwill amortization for European companies. (3) LTM: Last Twelve Months; CY1: Calendar Year Forecasts One Year Hence; CY2: Calendar Year Forecasts Two Years Hence; CFS: EBITDA less interest, taxes CAPEX and dividends on a fully diluted basis; L5Y:Last 5 years. (4) CGI reported its year ending September 2005 in early November while most of its comps have a December year-end thus CGI's FY1 is more similar to FY2 for the comps. Source: Progressive Financial Group Inc. - The analysis is based on data from external sources. $8.65 $3,687 $3,696 34.81 57.25 16.57 29.38 166.00 4,629 3,853 2,549 2,369 1,271 4,135 NEG 4,563 2,512 2,592 1,470 14.7 22.7 22.2 32.3 23.0 20.6 20.0 17.9 NMF 15.4 23.8 19.6 19.4 19.5 18.1 17.8 17.1 22.1 13.5 21.1 16.6 16.2 17.9 17.4 17.2 14.6 8.2 8.5 15.1 11.8 13.0 11.3 9.5 9.5 6.9 9.6 8.5 15.9 10.9 9.7 10.9 9.1 8.9 6.7 8.1 NMF 7.6 14.2 9.6 6.7 9.2 7.5 7.3 6.0 11.3 17.2 16.4 17.2 15.5 13.4 13.4 11.0 0.6 0.8 2.1 1.6 0.9 1.2 1.0 0.9 1.0 14.3 9.8 19.4 14.1 19.4 15.4 13.4 13.6 10.3 1.6 2.2 10.1 4.3 3.3 4.3 3.5 2.8 1.5 -0.4% 20.8% 12.1% 8.3% -1.2% 7.9% 7.3% 7.2% 21.0% 3.7% 4.6% 10.7% 8.5% 23.3% 10.2% 7.3% 6.6% 6.0% $28.36 $23.47 $49.11 $55.16 $7.59 $6.13 $14.07 $36.30 $10.44 $6.81 $24,113 $12,355 $9,234 $7,094 $2,092 $1,510 $1,671 $805 $627 $428 $22,222 $13,133 $9,613 $7,824 19.1 16.1 17.0 19.1 15.7 16.8 NEG NMF 16.3 19.8 18.3 15.5 17.4 17.2 18.1 23.8 13.9 15.0 NMF 21.5 14.6 17.9 16.3 13.1 17.1 16.8 9.6 5.6 4.6 8.7 12.6 6.8 8.8 8.1 11.8 8.6 8.6 9.4 6.5 4.8 8.3 9.3 6.9 9.3 8.9 9.0 8.1 8.3 6.6 5.0 4.4 7.5 6.4 NEG 7.2 6.2 8.2 7.3 8.0 6.7 6.8 16.4 9.2 10.5 12.8 12.2 12.4 12.1 11.0 17.6 10.1 12.0 1.3 0.6 0.6 1.7 0.5 NEG 0.5 0.8 1.2 0.7 0.8 0.9 0.8 13.2 13.9 16.1 11.9 16.3 12.4 12.6 17.4 6.2 5.5 10.6 NEG 1.3 1.8 2.2 1.4 1.1 3.0 1.7 14.2 1.7 1.4 2.4 12.5% 1.6% 9.1% 17.7% -4.7% 11.7% 10.2% 10.7% 1.3% -0.2% 7.0% 7.1% 3.1% 0.6% 6.4% 16.3% 1.3% 2.9% 10.3% 8.1% 7.5% 2.7% 5.9% 5.3% 31.2 NMF Price Market EV Price/Earnings LTM CY1 CY2 LTM EV/EBITDA CY1 CY2 EV/EBIT EV/Sales LTM LTM Price/CFS LTM Price/BV LTM CAGR (Revenue) L5Y 05-'06

13-Dec-05 Cap.

$2,743 NEG $1,757 NMF $1,517 $672 $631 $615 15.3 21.1 20.4 14.7 19.4 18.2

9.6 NMF

Page 21

Exhibit 6 U.S. AND CANADIAN TARGET ISSUER BID PRECEDENT TRANSACTIONS

Company

Targeted Shareholder

Announc. Date

Bid Price

Pre-announc. Premium Share Price

20-Day Premium # Shares Shares Per cent Average in TIB O/S of Shares Share Price (millions) (millions) O/S $13.82 -3.70% 9.0 126.5 7.10%

Methanex Corp. Nova Chemicals Co 21-May-03 Mediagrif Interactive Technologies Inc. Consumer Electron 9-Aug-02 Saskatchewan Premium Brands Wheat Pool 16-May-01 Canadian Occidental Occidental Petroleum Ltd. Petroleum Corp. 1-Mar-00 BioChem Glaxo Welcome 11-Jun-99 Camdev Corp. Citibank Canada 31-Mar-97 Average Average (Excl. High and Low)

$13.30

$13.81

-3.70%

$3.15 $13.69

$4.10 $15.85

-23.20% -13.60%

$3.66 $15.89

-14.00% -13.90%

5.1 2.2

23.1 7.8

22.10% 27.80%

$29.61 $20.00 $5.40

$26.90 $19.38 $6.20

10.10% 3.20% -12.90% -6.70% -6.70%

$28.27 $19.33 $6.24

4.70% 3.50% -13.40% -6.10% -6.90%

20.0 8.0 8.0

138.3 109.0 24.3

14.50% 7.30% 33.00% 18.60% 18.30%

Source: Progressive Financial Group Inc.

Page 22

Exhibit 7 CGI GROUP INC. DCF ANALYSIS SUMMARY PROJECTED FREE CASH FLOWS

C$ Thousands. 2005A
Revenues $3,685,986 Percentage Change EBITDA Margin 14.2% EBITDA $524,307 Depreciation and Amortization $166,469 EBIT $357,838 Taxes $114,126 Expenditures Working Capital CAPEX Free Cash Flows Terminal Perpetual Growth WACC Terminal EBITDA Multiplier Time Exponent PV PV Terminal Value - Infinite Growth Model PV Terminal Value - EBITDA Multiplier Model

Year Ending September 2006 2007 2008

$4,159,635 12.85% 15.2% $632,265 $213,046 $419,219 $149,242 $2,296 -$296,960 $183,767 3.50% 10.50% 5.5 1 $166,305

2009

Cash Flow 2010 Terminal

$6,481,541 4.90% 15.7% $1,017,602 $322,631 $694,971 $252,275 -$17,868 -$292,594 $490,601

$4,637,993 $5,106,431 $5,617,074 $6,178,781 11.50% 10.10% 10.00% 10.00% 15.4% 15.6% 15.6% 15.6% $714,251 $796,603 $876,263 $963,890 $218,083 $262,525 $277,213 $302,734 $496,168 $534,078 $599,050 $661,155 $172,170 $193,870 $217,455 $239,999 -$70,192 -$163,503 $448,770 -$30,997 -$227,858 $405,872 -$26,546 -$253,454 $431,900 -$28,237 -$278,799 $473,328

2 $367,535

3 $300,817

4 $289,691

5 $287,310 $4,248,088 $3,217,946

EV - Terminal Infinite Growth Model EV - Terminal EBITDA Multiplier Model Net Debt Equity Value Shares O/S Price Major Assumptions Effective Tax Rate CAPEX as % of Depreciation
Source: Progressive Financial Group Inc.

Infinite Growth $5,659,746 $7,000 $5,652,746 430,600 $13.13 34.2% 117.9% 35.6% 108.3%

Exit $4,629,603 $7,000 $4,622,603 430,600 $10.74 34.7% 58.0% 36.3% 74.1% 36.3% 90.5% 36.3% 90.5% 36.3% 90.5%

Page 23

Exhibit 8 CGI GOUP INC. SELECTED FINANCIAL DATA POST ANNOUNCEMENT OF SPECIAL ISSUE BID
Research Report Revenue (Millions) 2006E 2007E $3,870 $3,818 $3,740 $3,485 $4,064 $3,895 $4,012 EPS 2006E 2007E $0.64 $0.58 $0.63 $0.63 $0.71 $0.66 $0.70 $0.72 P/E 2006E 13.60 14.40 13.90 13.90 2007E 12.20 12.60 12.50 12.20 Price Target $10.00 $9.25 $10.00 $9.50

CIBC World Markets Citigroup National Bank Financial RBC Capital Markets

Exhibit 9 CGI GROUP INC. STREET CONSENSUS SUMMARY OF ANALYST ESTIMATES

12-Month Price Target (average) Estimated EPS Average High Low Number of Estimates
Source: Progressive Financial Group Inc.

$9.50 2006 0.57 0.66 0.53 15 2007 0.64 0.8 0.57 12

Page 24

Exhibit 10 BCE INC. NET ASSET VALUE (NAV) As of December 2, 2005

Bell Mobility Bell ExpressVu Bell Canada (Wireline) Bell Canada Gross Value less: Bell Canada Net Debt Bell Canada Net Asset Value Aliant (53.2%) Bell Canada Holdings Net Asset Value Bell Globemedia CGI Telesat & Other BCE Gross Net Asset Value Less: BCE Inc. Net Debt Less: BCE Inc. Preferreds Net Asset Value (pre-holdco discount) Less: Holding Company Discount Net Asset Value

2006/07E Estimates $MM $/Share $11,315 $12.21 $3,763 $4.06 $19,885 $21.45 $34,963 $37.72 ($9,627) ($10.39) $25,336 $27.33 $2,446 $2.64 $27,782 $29.97 $2,000 $2.16 $1,155 $1.25 $2,524 $2.72 $33,460 $36.10 ($1,941) ($2.09) ($1,670) ($1.80) $29,849 $34.20 ($1.25) ($1,155) $28,694 $30.95

Source: RBC CM Research Report on BCE, Dec.19, 2005.