Blackstone to takeover Mphasis for up to Rs 7,071 cr

In the biggest private equity deal in the country, US-listed Blackstone today said it will invest up to Rs 7,071 crore to acquire a majority stake in mid-sized IT services exporter Mphasis from Hewlett Packard Enterprise.
Blackstone India will acquire HP's 60.5 per cent stake in the company at Rs 430 apiece, which will trigger an open offer for acquiring 26 per cent from other shareholders of Mphasis, for which it has announced a price of Rs 457.50 a share.
Depending on the outcome of the open offer, the US based asset manager will pay anything between Rs 5,466 crore and Rs 7,071 crore for taking control of the IT company.

One of the biggest draws for the private equity firm was a guarantee by HP to source at least USD 990 million of work from the company over the next five years as part of a 11-year contract, Blackstone India's Senior Managing Director Amit Dixit told reporters over a conference call.
At present, HP accounts for over 27 per cent of the revenue, which is slated to touch USD 1 billion this fiscal for the Bengaluru-headquartered company, he said.
Mphasis has reduced its dependence on HP's business (from 65 per cent contribution to revenues some five years ago to 34 per cent in 2014-15). Also, non-HP business has been growing at 20 per cent year-on-year.

Dixit added Mphasis will also get recognised as a preferred partner by HP, which will be revenue accretive for the company.

Investors were not so enthused by the deal and the stock was trading 2.87 per cent down at Rs 454 on BSE during the pre-close session.
Announcement of the transaction after signing of a definitive agreement between the two parties ends speculation over the suitor for the IT exporter, which was put on the block by Hewlett Packard (HP) Enterprise.
India's Fifth largest IT company Tech Mahindra and private equity fund Apollo Global Management were also in the race.

Dixit today said Blackstone, which has invested over USD 6 billion in private equity and realty transactions in the country over past decade, has taken a long-term view while arriving at the outbidding valuation and was not driven by recent performance of Mphasis scrip.
Dixit said Blackstone's global portfolio companies have
revenue of over USD 86 billion, presenting a potential spend of over USD 5 billion per year.
Citing how Intelenet benefitted from this in the past, he said all the bidding for investee company's IT contracts will be done at an "arm's length" by Mphasis.
Mphasis' focus on the lucrative banking, financial services and insurance vertical, retention of clients including the top-billing ones and the strong performance in the emerging digital space were big positives, he said.

Terming Mphasis' leadership team as a strength, Dixit said Blackstone will continue with the same top management.
There will be more investments in the digital side, including additional hiring and Mphasis may also look for strategic acquisitions of small-sized players to help the business, the senior managing director added.
He also counted on Mphasis' delivery capabilities and client satisfaction which was established independently during due diligence as critical factors which prompted Blackstone to go for the company.
"All these things give the business a stability, predictability and growth opportunity," he said.
(REOPENS BCM 8)
"The excitement is there in me personally, in my team, employees to whom we have spoken and we feel this can set up a platform for accelerated growth, stability and predictability," Mphasis CEO Ganesh Ayyar said.

To a question on him signing any agreement on staying with Mphaisis for a certain number of years for smooth transition, Ayyar said, "If you look at my profile... I'm a two company man, I worked for HP for about 20 years, I have now worked for Mphasis for seven-and-half years. I believe that the long term commitment to your employer is absolute must," he said.
He further said: "At this point of time, if you are asking me whether I have committed my life to any such transaction saying that I'm going to stay for X number of years, the answer is no. But is there a risk that I'm going to jump the ship, absolutely not. I have never done that in my career, so I'm not going to change that when I'm 54 years old."

Arup Roy, Research Director at Gartner, said the deal will give Mphasis an opportunity come out of shadows.
"Ever since its acquisition by EDS and then with HP acquiring EDS, Mphasis went into oblivion. Although, it always had its own legal identity with its own business and go-to-market, however it never was able to establish itself as a visible and credible provider beyond the fact that it was an HP entity," he said.
Roy added that the buyout would give Mphasis an opportunity to come back into the mainstream IT services as "a force to reckon with".
"Moreover, Blackstone portfolio companies could in itself be an opportunity to mine," he said.

Hewlett Packard Enterprise (HPE) in a statement said at the proposed price, its stake is valued at approximately USD 825 million.
"While HPE's decision to exit its equity position in Mphasis aligns with its current capital allocation priorities, the agreement is not expected to have any adverse impact on HPE's ongoing commercial relationship with the company," it added.
HPE said the transaction is expected to close in the second half of fiscal 2016, subject to agreed closing conditions.
"While our financial relationship is changing, the business and commercial relationship with Mphasis remains an important part of our service delivery strategy," HPE Enterprise Services EVP and GM Mike Nefkens said.

HPE recognised approximately USD 650 million of revenue and USD 110 million of operating profit from Mphasis, on a fully consolidated basis, in fiscal year 2015.