After months of speculations about the fate of Vertex, the BPO subsidiary of United Utilities, a group of private-equity investors, led by Oak Hill Capital Partners, have finally acquired the firm in a $427 million (GBP 217.5 million) buyout. The other firms involved are GenNx360 and Knox Lawrence International.

This is the fourth BPO buyout involving the sale of a large captive unit in the last five years.

Earlier, GE, British Airways and Conseco have taken similar routes to sell their captive offshore operations. Vertex is the first major onshore service provider (albeit with a fairly strong offshore presence) to take this route.

In June 2006, United Utilities said that it had appointed Merrill Lynch to look at future options for Vertex. The U.K. media at that time had reported that it was already considering a sale of the unit. India’s top IT outsourcing firm, Tata Consultancy Services (TCS) was reported as a serious contender. TCS’ senior executives have often on the record said that the company considers the buying out of captive units as a major opportunity. Since then, media reports have suggested that U.S.-based outsourcing service provider, EDS, was also keen on the buyout.

However, it is only while announcing its results for quarter ending Sep. 30, 2006, that United Utilities announced its decision to “sell” the unit.

Since then, names of different private-equity firms have come up as the possible acquirers of Vertex. They include BridgePoint, Montagu and 3i — all private-equity firms with a focus on mid-market investments. Indian media reported 3i tying up with Indian BPO pioneer Raman Roy’s firm, Quattro, to make the acquisition.

In most of these reports, the possible valuation figures cited for Vertex have ranged anywhere between $600 million — one billion dollars. The current valuation, by that standard, falls short of expectations. This could be due to the declining valuation of voice-based call-center services, which forms the lion’s share of the revenue of Vertex. All the major BPO captives sold so far have predominantly been back-office processing units.

However, Vertex also differs from others in the sense that it is already an established third-party service provider. Most others like GE’s and British Airways’ subsidiaries started the transformation from a captive unit to third-party unit after the buyout.

LBOs As the Preferred Mode of Exiting Captives

Here is a brief roundup of the exits by large corporations using the leveraged buyout route.

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.

Since then, both WNS and EXL have listed on American stock markets and the stocks have performed well.

The Non-Captive LBOs in Outsourcing

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 buyouts 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.