US company mounts Kalamazoo rescue

Kalamazoo, the troubled UK computer services company which named itself after a one-horse town in Michigan, has once again turned to the US, this time for a rescue refinancing.

Reynolds & Reynolds, a US leader in car dealer software, is to buy a 26.5 per cent stake in Kalamazoo for pounds 21.5m, with an initial cash injection of pounds 17.68m. The cash deal at 130p a share is a staggering 72 per cent premium to the pre-bid price.

Shares in Kalamazoo, which took the opportunity to warn of a substantial first-half loss due mainly to investment in its car dealer software Elite, closed 9.5p ahead at 85p.

The deal ends months of takeover speculation. Shares in the company, which tumbled earlier this year after a profits warning and revelations of accounting problems, have been supported by bid rumours, including a shunned approach from UK rival Lynx.

Bob Jordan, chairman, called the link-up with Ohio-based Reynolds, an "elegant solution to a difficult problem". Analysts said the deal looked remarkably free of strings, wiping out Kalamazoo's sky-high debt. Though Reynolds, which is capitalised at $1.6bn (pounds 1bn), will appoint non-executive directors to Kalamazoo's board and share products, there are few other binding conditions and Reynolds has agreed not to buy more shares in Kalamazoo for two years.

"This is a true strategic alliance," said Mr Jordan. "They are putting pounds 20m into our company at a hell of a premium, they will exchange products and put non-executives in, but they have no special privileges."

The deal will give Kalamazoo the cash it desperately needs to develop its car dealer software system. "We were near the limit of our bank borrowing facilities. Our gearing was uncomfortably high. We are having a torrid first half," said Mr Jordan.

He was equivocal on whether Reynolds was planning to launch a full bid after two years: "We'll cross that bridge when we come to it."

Analysts said that Reynolds, which has a good spread of products in the US, was a sound partner and was probably interested in Kalamazoo for the platform it would provide into the European car dealer software market, where it has no foothold. Kalamazoo has a 45 per cent market share in the UK.