There are strong speculations that 3i, a U.K.-based private-equity firm and Raman Roy, considered to be the father of Indian outsourcing, have partnered to buy out Vertex. Vertex is the BPO subsidiary of British utility company, United Utilities. What gives credence to the speculation is that 3i had recently hired Akshaya Bhargava, ex-CEO, Progeon, Infosys’ BPO arm, to build a portfolio in the outsourcing area. The deal could be worth $600–$700 million, according to media reports.
Previously, there were reports about Indian technology-services company, TCS, buying out the firm, but it never materialized.
If the deal materializes, it will be a Leveraged Buyout (LBO), in contrast to the usual strategic sellout. Vertex’s parent, United Utilities, will follow the footsteps of peer global corporations, which have in recent years, chosen to spin off the subsidiaries in such buyouts. The outsourcing industry has plenty of examples — almost all of them in the last five years.
The most high profile, though not the oldest, is that of offshore pioneer, GE, which in Nov. 2004, decided to sell a majority stake (60%) of its Gurgaon, India-based offshore services subsidiary, GE Capital International Services (GECIS) to two private-equity firms, Oak Hill Capital and General Atlantic Partners. The deal, that valued GECIS, now called Genpact, at $800 million, created the biggest pure-play offshore BPO company in the world, almost overnight.
Oak Hill, along with another firm, Financial Technology Ventures, had executed a similar buyout, though of a much lower size exactly two years back, in Nov. 2002. The two firms had bought out another pure-play offshore BPO firm, Exl Service, from its parent Conseco, the U.S.-based insurance firm that had filed for Chapter 11. The value of the deal was not made public. It involved Vikram Talwar, CEO, Exl and Rohit Kapoor, President, Exl also buying significant stakes.
The honor of being the oldest LBO involving an offshore-services company, however, goes WNS Global Services, Mumbai, India-based offshore services subsidiary of British Airways. American private-equity firm, Warburg Pincus, bought a controlling stake in the company in April 2002. WNS successfully listed on the New York Stock Exchange last month, and is valued at over a billion dollars, based on its price as on Aug. 16, ‘06.
Other similar LBOs involving outsourcing units, include HIG Capital’s buyout of Stream International from contract manufacturer, Solectron in March 2004. The other big name in contract manufacturing, Flextronics, also sold its software-services subsidiary, Flextronics Software Systems in an LBO in April this year, in a transaction valued at $900 million to Kohlberg Kravis Roberts & Co. (KKR). Flextronics had bought the India-listed software company less than two years back from Hughes.
While most of these LBOs involved one major shareholder exiting, there are a few examples of listed companies going private through such buyouts. Just a few weeks back, one of the biggest collections and receivables management company, NCO Group, went private in a buyout by One Equity Partners, a private-equity affiliate of JP Morgan Chase & Co. and Michael J Barrist, Chairman and CEO of the company.
One of the biggest LBOs of all times also involved an IT-services company. In March 2005, a consortium of private-equity firms consisting of Silver Lake Partners, Bain Capital, The Blackstone Group, Goldman Sachs Capital Partners, KKR, Providence Equity Partners and Texas Pacific Group announced a $11.3 billion buyout of SunGard, a financial software and services company, listed on the NYSE.
Since then, there have been speculations from time to time about the possible buyout of many firms including large outsourcing companies such as CSC and ACS. CSC, whose possible buyout has been reported several times by the media, has denied it recently, and has proposed a re-structuring plan shelving a lot of jobs in Europe.
