A recommended takeover offer for iSoft faced a severe setback this morning after CSC, the healthcare IT group's largest customer, vetoed the deal.

Shares in iSoft were trading down 19 per cent, or 9.75p, at 41p in by noon, after CSC told the UK group that it did not intend to recommend the proposal from IBA Health, the Australia-listed group.

IBA's all-share offer would have valued iSoft at about 58.1p each, or £140 million, but depended on the Sydney-based company raising £84 million through a placing and rights issue. ABN Amro, the Dutch bank, was set to provide new facilities of £130 million to bolster IBA's finances.

iSoft is a key sub-contractor on the NHS's £12 billion IT transformation programme. It is providing software and other services to CSC, which is one of the larger contractors on the programme.

BACKGROUND

• ISoft merger back on course

• CSC prepared to offer cash for iSoft

• CSC 'to counterbid for iSoft' says NHS supplier

• Problems at Isoft are far from over

• Sparks fly between ISoft and CSC

ISoft comment: The hardline

ISoft is considering legal action against CSC over its attempt to block a sale to IBA. Read the comment here.

Related Internet Links

• ISoft company information

• ISoft share price chart

• ISoft forecasts

Related Links

• IBA poised to move on £230m iSoft takeover

• IBA Health in iSoft bid talks

• IBA Healthcare poised to launch iSoft bid

The UK group requires the consent of both CSC and the NHS's Connecting for Health unit, which manages the IT project, in the event of a change of control. CSC's agreement with iSoft runs to January 2016. However it can terminate the contract earlier if there is a change of control at iSoft.

NHS Connecting for Health today said the issue was "a matter for CSC". It is understood that the NHS agency has not indicated whether it would or would not be in favour of a deal.

CSC did not give any reason for its refusal to back the bid and this morning declined to clarify its position.

IBA said it would seek further clarification from the US group.

"Both iSoft and IBA are considering their respective positions and further announcements will be made in due course," the UK group said in a statement.

ISoft is racing to secure its future, having last year agreed short-term banking arrangements which expire in November, with interest payments increasing periodically. The company said at its annual meeting last year that it was exploring a number of takeover approaches but had also spoken to shareholders about a possible rights issue to shore up its balance sheet.

The company hit problems last year when it was forced to admit that it had discovered accounting irregularities. A formal investigation later confirmed that revenues had been booked too soon, forcing the company to rewrite previous years' accounts.

McKesson, the US drugs distribution company, is also understood to have expressed an interest in buying the group. General Atlantic, the US private equity group and a previous shareholder, was excluded from talks in April.

Paul Morland, an analyst at Arbuthnot, said in a note to clients: "CSC would need to have absolute confidence in the future of iSoft, which is key to its role in 60 per cent of the National Programme."

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive