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By John Revill
ZURICH, Feb 21 (Reuters) - Swiss software company Temenos said it has agreed a 1.4 billion pound ($1.96 billion) deal to buy British peer Fidessa Group, whose shares traded above the offer price as an activist investor disclosed a stake of nearly 5 percent.
The deal on Wednesday came a day after the two companies announced advanced talks for a takeover that would add Fidessa's equities trading technology to expand Temenos's customer base in the financial services industry.
Fidessa shareholders would get 35.67 pounds for each share in the all-cash deal, expected to be completed in the first half of 2018. The British company's investors will also get a final dividend and a special dividend of 79.7 pence for 2017.
The price represented a premium of roughly 36.9 percent on Fidessa's opening price of 26.05 pounds per share on Feb. 16. Temenos shares slipped 0.9 percent by 0850 GMT, while Fidessa's stock gained 4.3 percent to 37.25 pounds.
Activist investor Elliott Capital Advisors disclosed a 4.8715 percent stake in Fidessa.
Temenos said it is borrowing up to 1.43 billion pounds to pay for its biggest ever acquisition and would later raise cash on the capital markets to reduce its debt.
It declined to comment on the size of the capital raising. Zuercher Kantonalbank analyst Andreas Mueller estimated it could look to raise $400 million to $450 million.
The deal "will accelerate both companies' complementary growth strategies in banking and capital markets and will enable us to cross-sell into our existing client bases and capture a greater share of the IT and software spend of banks especially as they move to the cloud", Temenos Chairman Andreas Andreades said in a statement.
The enlarged company would have had revenues of more than $1.2 billion in 2017, and a core profit margin of 32.3 percent, which Temenos said it expected to increase to 37 percent after annual savings of $60 million were achieved.
Temenos said it expected the deal to be earnings accretive in 2018, and boost earnings per share in the mid-teen percentage range from 2019 onwards.
Andreades said software in the capital markets industry was highly fragmented and dominated by older systems, creating an opportunity for the combined company's offering.
Financial institutions spent an estimated $14 billion on capital markets software in 2018, with $3 billion going to third party vendors like Temenos. Such total spend is expected to grow by 8 percent per year, the company said.
"The synergies, which are higher than we expected, and the increase in sales and increase in adjusted earnings from the first year are positive aspects," said ZKB's Mueller.
"The industrial logic is clear. Many banks in Asia and Europe are offering a trading business in addition to retail and asset management, which gives clear cross selling potential," he added.
$1 = 0.7152 pounds Editing by Michael Shields