Blackstone Group agreed to buy out Hewlett Packard Enterprise’s (HPE) majority shareholding in Bengaluru-based IT services provider Mphasis Ltd., in a deal worth up to Rs.7,071 crore. The transaction will be the U.S. private equity firm’s single largest investment in the country.
According to Blackstone, it will acquire at least 84 per cent of the 60.5 per cent stake owned by HPE and make an open offer for buying another 26 per cent from the public.
The company said it would pay a purchase price of Rs.430 per share to HPE and Rs.457.50 apiece for shares bought from the public through an open offer.
Based on the open-offer subscription, the purchase price consideration will vary between Rs.5,466 crore and Rs.7,071 crore (approximately $825 million - $1.1 billion). The transaction is expected to close in the coming months subject to approvals. “Mphasis’ has strong domain expertise in banking, financial services and insurance vertical,” said Amit Dixit, Senior Managing Director and Co-Head of Private Equity in India at Blackstone. “Its deep relationship with marquee global customers has enabled it to deliver growth above the industry average in its direct international segment,” he said. HPE has been trying to exit its investment in Mphasis for several months. Tech Mahindra and Apollo Global Management were among the contenders. However, Blackstone sealed the deal as it saw medium to long-term growth potential in Mphasis.
In a separate media statement, HPE said, “Under the terms of the agreement, Blackstone has agreed to purchase at least 84 per cent of HPE’s stake in Mphasis.” HPE's decision to exit its majority holding in Mphasis is part of its current capital allocation priorities, according to the statement.
As per the terms of the definitive agreement, HPE has also signed a master services agreement with Mphasis. The duration of the agreement is five years with three automatic renewals of two years each under which HPE has proposed to commit a minimum revenue amount escalating year-over-year and totalling $990 million.
Apart from the services agreement, Mphasis will be included in HPE’s Preferred Provider Programme opening up significant additional revenue opportunities. “This deal is going to give Mphasis an opportunity to come out of shadows that it had walked into,” said Arup Roy, Research Director, Gartner. “The Blackstone buyout would allow it come out of its oblivion status and will give it an opportunity to come back into the mainstream IT services.” The MSA is considered as an achievement for Blackstone as it ensures steady revenue for the Mphasis post the closure of the deal. HPE’s contribution, which accounted for more than 50 per cent of Mphasis’ revenue, has been declining over the years. Presently, it contributes almost 27 per cent of the overall revenue.
The company’s direct business contributes half of the total revenue and is growing at approximately 14 per cent per annum. Meanwhile, HPE business is declining between 19 to 20 per cent per annum. “The commitment from HPE to Mphasis through the MSA gives us predictability and stability of the business going forward. The delivery capabilities and experienced management team are also two important aspects for the growth,” said Mr. Dixit.
Blackstone also said that it has no plans to change the current management structure of Mphasis.
When asked about his future plans and agreement with the company, Mphasis CEO Ganesh Ayyar said: “I believe that the long term commitment to your employer is an absolute must.”
The buyout of controlling stake in Mphasis is the third deal by Blackstone in the Indian IT industry. Recently, it acquired stake in Intelenet and also bought stake in Thiruvanthapuram-based IBS Software, an aviation solution provider.
In addition to the prospects through MSA, the deal will offer Mphasis access to portfolio of companies of Blackstone across the globe.