Blackstone exits, makes two-fold profit in four years.
UK-based Serco has bought Intelenet, a business process outsourcing (BPO) company, for £385 million (Rs 2,864 crore).
This will lead to the exit of private equity (PE) firm Blackstone, the majority shareholder in Intelenet, after making over two-fold profit in four years.
This is the second-largest deal in the Indian information technology (IT) and IT-enabled services sector this year. Early this year, iGate bought Patni Computer Systems for $1.2 billion.
| TOP DEALS This is one of the largest deals in the BPO space since 2007 | |||
| Company | Target | Size | Year |
| Serco | Intelenet | $635mn | 2011 |
| TCS | Citi Global Services | $505mn | 2008 |
| WNS | Aviva Captive unit | $228mn | 2008 |
| Firstsource | MedAssist | $330mn | 2007 |
| Blackstone | Intelenet + Sparsh BPO | $200mn | 2007 |
The announcement comes a day before new merger and acquisition (M&A) rules come into force. Deals announced before June 1 are exempted from the rules.
For Serco, which reported £4.32 billion revenue in 2009-10, this is the second acquisition in India, one that will strengthen its presence in the commercial BPO space. Intelenet has 32,000 employees and is present in eight countries.
The £385 million figure includes earnout payments of up to £50 million on certain parameters.
In 2008, Serco had bought a 60 per cent stake in the Infovision group for Rs 97 crore.
Blackstone’s $200 million investment in Intelenet was one of its earliest in India. The PE firm’s 66 per cent stake has been valued at $420 million (Rs 1,890 crore).
“As a PE player, we would obviously want to exit. We could have waited for another year and got higher valuations but this seemed the right opportunity. We were clear that if we didn’t take the public route to exit, we would find the right buyer,” said Akhil Gupta, chairman and managing director, Blackstone Advisors India Pvt Ltd.
Barclays and HDFC, which have 12.75 per cent and 4.5 per cent stakes, respectively, have also decided to exit. They will get £49.08 mn and £17.32 mn, respectively. The management’s 16.5 per cent stake has got it £63.5 mn ($105 million).
IMPLICATIONS
For Serco, a service provider to government, defence and education sectors, this will mark an entry into the BPO segment and the fast-growing domestic BPO market.
“The acquisition supports our ambitions as a leading global service company. The international BPO market is growing fast as companies seek new ways to improve services and reduce costs. Intelenet’s high-value capabilities and customer base, together with economies of scale, means we can access new markets and strengthen our existing propositions,” said Chief Executive Chris Hyman.
The management team will stay. In 2007, when Blackstone bought Intelenet, it was one of the largest management buyouts in the country. Blakstone had retained the team headed by Chief Executive Susir Kumar.
“This is possibly the last time we will have management changes. We are confident this will make us grow faster, as we now have a strategically-aligned partner that has a long-term growth plan. The executive team at Intelenet believes in this arrangement as Serco has agreed to give us independence in driving the business and we have a senior member from Serco joining us,” said Kumar.
For the year to March 31, 2011, Intelenet’s revenue was £170 mn (Rs 1,265 crore) while adjusted operating profit was £19 mn (Rs 141 crore).
Serco expects Intelenet to continue achieving revenue growth of 10-15 per cent a year and maintain its adjusted operating profit margin, before net cost synergies, at 12 per cent. The acquisition is expected to be accretive to earnings in the first full year, with returns covering Serco’s cost of capital in the third full year of ownership.
“I think the valuation that Intelenet has got is similar to the peer firms. From an Ebitda (earnings before interest, taxes, depreciation and amortisation) standpoint, it is between 10.5 and 12 multiples if control premium is included. From a revenue point of view, it is 2.2 times,” said Kumar.
Industry analysts say the deal is expensive but gives Serco an entry into high-margin BPO business.
The IT/ITeS segment has seen eight acquisitions this year.
Analysts tracking the sector believe the activity in expected to pick up as the industry sees consolidation. “While the deal seems to be on the expensive side, it will give Serco access to a large offshoring set-up as well as the growing domestic BPO market,” said Nikhil Rajpal, partner, Everest Group. He feels M&A activity is getting a push from both the need of PE firms to sell out of many BPOs as well as a genuine need for consolidation.
