Accenture Rises on Handoff

The IT services company rises 6% on news of the takeover by CSC of its U.K. health service contract.
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Investors and analysts alike applauded Thursday's news that

Accenture

(ACN) - Get Report

is handing over its problem contract with the U.K.'s National Health Service to

Computer Sciences

(CSC)

.

Shares of the IT services contractor in early trade added more than 6%, changing hands at more than three times its usual volume, and recently tacked on $1.65, or 5.6%, to $31.01.

CSC rose 87 cents to $48.92 in light trading.

The contract covers the NHS's health care service in England's northeast and east and is worth up to $3.7 billion over nine years. CSC will take over the deal, adding to its NHS work in the northwest and West Midlands regions of the country.

"I think it's a great deal," says Standard & Poor's equity analyst Dylan Cathers. "It's a win-win for both companies."

For Accenture, "the contract had been a bit of an albatross," Cathers says. "The U.K. government was not happy. There was a lot of friction."

Earlier this year, Accenture had taken a $450 million charge to account for expected losses on the contract relating to delays in its delivery. Cathers, whose firm does not do any investment banking with, and who does not own shares of either company, says it's possible that Accenture would reverse some of those charges with the deal shifting to CSC.

Cathers, who has a buy rating on Accenture, upped his target price to $34 from $32.

"ACN's business has been performing well through the last year in terms of revenue growth and margin expansion," Bear Stearns analyst Andrew Steinerman wrote in a Thursday note.

"The only major holdback has been the NHS contract, now removed. The expected fiscal year 2007 losses for NHS were 10 cents, which should now be mitigated."

Steinerman has an outperform rating on the stock. His firm seeks to do business with the companies it covers.

JP Morgan analyst Tien-tsin Huang said that Accenture may have to pay a termination fee for the NHS deal, but assuming that it's not significant, shedding the contract should be a boost for the stock.

"The elimination of contract risk and investors fears of more problems should outweigh the potential negative perception by current and prospective clients about ACN's commitment to its clients," Huang said.

"NHS represents about 1% of revenue; we will update our model post earnings," he said. Both Accenture and CSC are current or recent clients of JP Morgan.

Accenture reports its fourth-quarter and fiscal 2006 results on Thursday after the close of the market.

Since the original contracts were awarded in Dec. 2003, CSC seemed to do a better job managing

iSoft

, the third-party subcontractor that provided software for the deals, S&P's Cathers says.

And government contracts are CSC's bread and butter. Late last year, there was rampant speculation that

CSC was in play and that "the interested parties really wanted to get their hands on

CSC's government sector," Cathers says.

"The government side of CSC is very strong," he says. He has a hold rating on the stock and a target price of $52.

"We view this as a positive development for CSC, as it should help increase bookings and provide a booster-shot to the company's restructuring plan," Prudential Equity Group analyst Bryan Keane says.

"CSC has had success in its relationships with the U.K. NHS in the past, and we are optimistic that this track record will continue," adds Keane.