Blackstone to buy back Serco’s BPO unit for $385M

Blackstone has signed an agreement with UK's Serco Group to buy majority of its private sector business process outsourcing (BPO) operations for £250 million (Rs 2,558 crore or $385 million), in its single biggest PE deal in India.

The gross consideration comprises £220 million ($339 million) in cash and a £30 million ($46 million) loan note. The loan note accrues interest at a rate of 7 per cent per annum and is to be repaid to Serco. The gross consideration received will be reduced by transaction costs, deferred consideration fair value adjustments and the value of certain indemnities for potential tax positions, Serco said.

For the alternative investments giant that has been a more active investor in the real estate sector in India lately, this is the first addition to its PE portfolio in the country in almost two years.

Interestingly, this would effectively mark a buy-back of pretty much the same asset Blackstone sold to Serco four years ago. At that time Serco had paid $634 million (Rs 2,850 crore then) to buy Intelenet. Blackstone held majority stake in Intelenet and had sold it in its biggest exit deal from India to date.

The deal involves the sale of Serco's offshore private sector BPO operations, which primarily comprises the former Intelenet business. These operations consist of middle and back-office skills and capabilities across customer contact, transaction and financial processing, and related consulting and technology services.

These units employ 51,000 people in 67 BPO service delivery centres, of which 48,000 employees and 53 centres are in India. Its customers are predominantly in the financial services, telecoms and travel sectors, with approximately 70 per cent of the business being international offshore BPO and 30 per cent being Indian domestic BPO operations.

For the year ending December 31, 2015, this business is expected to generate revenues of approximately £235 million and contribute EBITDA of approximately £35 million. This business had clocked £235 million in revenues in 2014, broadly similar to the underlying result for 2014.

Post the change in ownership, the business will be rebranded and revived as “Intelenet Global Services.”

Amit Dixit, senior managing director and co-head of private equity in India at Blackstone, said: “We are excited to embark on the Intelenet 2.0 journey and delighted to once again partner with the company’s management team. With a market leading position in the offshore banking and travel/hospitality verticals and #1 position in domestic India BPO, Intelenet has the core platform to capitalise on future growth opportunities.”

“We plan to replicate the same formula for success—energise the employee base, focus on world-class operations to drive customer satisfaction, provide multi-geography and multi-language delivery, and enhance the company's capabilities in target segments organically and inorganically,” he added.

Susir Kumar, CEO of Serco Global Services, said the business was sold because of changes in strategy of Serco. Under the terms of the transaction, the business will continue to be led by Kumar, and the existing management team.

Intelenet

HDFC, along with Tata Consulting Services (TCS), had set up Intelenet as a 50:50 joint venture back in 2001. HDFC acquired TCS’ 50 per cent stake in Intelenet for Rs 161 crore in July, 2004, and sold it a month later to Barclays for Rs 164 crore. Two years later, it ventured into domestic BPO domain by acquiring Sparsh BPO.

In 2007, Blackstone bought an 80 per cent stake in Intelenet for $260 million in a management buyout deal, according to VCCEdge, the data research platform of VCCircle. In October 2010, Barclays picked up 12.75 per cent stake in the holding company of Intelenet for an undisclosed stake. HDFC also bought back a minority stake in the company.

At the time of sale to Serco in 2011, Blackstone owned 66 per cent stake in Intelenet, Barclays 12.75 per cent, HDFC 4.5 per cent and the remaining stake was held by the management team.

At that time, Intelenet was valued at £385 million ($634 million or Rs 2,850 crore then). This included contingent cash payments of up to £50 million through to December 2013 that was dependent on the delivery of additional revenue to Intelenet from Blackstone portfolio companies and Barclays.

This means Blackstone would have got around $423 million (roughly Rs 1,900 crore), making a neat profit of over 62 per cent on its four-year-old investment in dollar terms and almost doubling its investment value in local currency, as per VCCircle estimates. Rupee has depreciated sharply over the last four years.

What it means for Serco

Rupert Soames, group CEO of Serco, said: “In March 2015, we set out our strategy to focus on being a leading supplier of public services. A core part of that strategy was our decision to sell our private sector BPO operations.”

“This disposal will not only strengthen our balance sheet but also enable us to focus on the group’s five core markets. Overall, this gives us greater financial and operational flexibility to move forward, doing what we do best,” he added.

Serco also continues to evaluate the potential for further disposals of remaining loss-making private sector BPO operations, together with further actions to transfer contracts, serve notice to terminate contracts early or otherwise run-off the contracts over the remaining contractual periods. Its remaining private sector BPO business is predominantly UK onshore operations that are expected to generate revenues of around £90 million.

Serco said its overall exit from private sector BPO is estimated to be broadly earnings neutral and the proceeds from the latest transaction will be used to reduce debt.