To focus on consolidating its acquisition and reducing debt; impact of $175mn on annual top line and $24mn on EBIDTA.
Mumbai-based information technology (IT) services and product firm 3i Infotech has agreed to sell its US-based billing and payments unit, consisting of Regulus Group and J&B Software, to an affiliate of private equity firm Cerberus Capital Management, LP, for $137 million (Rs 614 crore).
The company expects the divestment will help reduce the leverage and strengthen its balance sheet. 3i Infotech has a total bank borrowing (net cash) of around Rs 2,100 crore. This sale will bring it down to Rs 1,500 crore. In addition, it also has debt due to funds raised via issuing foreign currency convertible bonds (FCCB).
However, the sale of these two businesses to Cerberus will mean an impact of $175 million (Rs 784 crore), on an annual basis, on the firms top line. The impact on the firms earning before interests earnings before interest, taxes, depreciation and amortisation (Ebitda) due to this sale will be $24 million (Rs 107.5 crore).
“Since the financial crisis started, the volume of billing work that Regulus received was coming down. This was evident in our results that shows a growth in our conventional IT products and services segment, where as transaction services (BPO) has been coming down. Rather it is down 11 per cent. In this backdrop we decided to sell these businesses,” said V Srinivasan, managing director & global CEO, 3i Infotech. With Regulus sale, the firm will now be focused on the Indian BPO segment which at present is a Rs 100-crore business.
However, the total amount of the sell-off is slightly higher than what 3i Infotech had paid to acquire these firms almost three years ago. In 2008, 3i Infotech had announced the acquisition of Regulus for $80 million. The company was also to pay an additional consideration of up to $20 million on an earn-out linked to performance parameters. In 2007, 3i Infotech acquired J&B Software for $25.25 million.
The company said this sale will make them focus more on the product and IT services segment. “This enables 3i Infotech to go back to its roots as a significant IT products and services player while at the same time allowing the billing and payments unit to be acquired by an organisation interested in growing it as an independent company,” said Sripat Pandey, head of M&A, 3i Infotech.
Rather Srinivasan said, going ahead the company will focus on consolidating the acquisitions that the firm has done over the past few years and growing the company organically. Since 2000, 3i Infotech has acquired close to 40 firms. “Over the next two to three years we would like to stabilise the balance sheet. Once we achieve this than we might look at acquisition,” he said.
This is not the first time that the company has sold off part of its business. In the third quarter of 2009-10 the company had announced its decision to pull-out of e-governance kiosk business. Though it continues to be in the e-governance segment, the company had said it would not be in government projects that require a large upfront investment and has inherent uncertainties. A few quarters back, the company had also hived off Taxsmile, providing online tax management portal.
When asked if the company is focusing on consolidating its acquisition as ICICI Bank is planning to sell its stake? Srinivasan said, “Some of the consolidation that we are doing is to move away from low margin business. Some of the acquisitions and businesses we acquired were as low as six to nine per cent. I do not think ICICI is in a hurry to sell its stake.”
On the recent buzz that IBM is in talks to acquire the company, Srinivasan said, “I have not heard from any company so far.”
3i Infotech’s share price at Rs 49.8 per share was flat compared to the previous close of Rs 50. Meanwhile Tim Price, a Managing Director and spokesperson, Cerberus said, “Cerberus has the financial resources and operational expertise to help this business build additional value through operating efficiencies and growth. As a standalone entity, the company will continue to focus on delivering the best products and highest quality services to its clients.”
