Private equity giant Blackstone Group announced it’s buying a majority stake in Mphasis, an Indian information-technology (IT) outsourcing services provider, from Hewlett Packard Enterprise in a deal that could cost as much as $1.1 billion.
This would not only be Blackstone’s biggest investment in India, but one of the biggest merger and acquisitions transactions in the country’s outsourcing sector.
A clear sign of Blackstone’s positive view on the outsourcing business, where western clients send IT jobs to countries such as India to cut costs is the decision to pay for the deal entirely in cash.
The US asset manager is betting that India’s IT industry will continue to grow in double-digits as companies move to high-margin digital services to offset a cut-back in routine IT spending by clients, a senior executive at the firm told Reuters.
In December, Blackstone paid $170 million for a minority stake in India’s IBS Software.
“The reason we have made a strong commitment to the Indian IT sector is because this is a sector which has delivered very strong returns to Blackstone and other (private equity) investors in India,” Amit Dixit, Blackstone’s senior managing director in India, said on a conference call after the deal was announced. “This sector is also poised for good growth … and especially digital services, an area in which Mphasis is strong in.”
Blackstone will pay 430 rupees ($6.49) per share for at least 84% of HP Enterprise’s 60.5% stake in Mphasis. It also made an open offer to buy a 26% stake in Mphasis from public shareholders for 457.54 rupees a share to comply with Indian laws.
If HPE takes the deal it could receive $825 million for its complete stake. The total cost of the transaction to Blackstone could be as much as 70.71 billion rupees ($1.1 billion). The deal is expected to close in the coming months, Blackstone said.
Mphasis shares fell 2.9% on Monday on the Mumbai markets. During the month of March, the shares jumped more than 11% in anticipation of a deal.
India’s IT and software services export revenue is likely to grow by 10% to 12% to as much as $121 billion in the fiscal year beginning April 1, according to trade body National Association of Software and Services Companies (Nasscom).
“This is a consolidating industry and Mphasis was the last big asset, you could see some more PE deals for smaller software companies in the sector going forward,” Ravi Menon, an IT sector analyst at Elara Capital told Reuters.