Serco agrees to acquire Intelenet, a leading provider of Business Process Outsourcing services to the private sector
Date: 31 May 2011
- Serco has today signed an agreement to acquire Intelenet, a leading provider of business process outsourcing (BPO) services to the private sector around the world and in the domestic Indian market, for up to £385m.
- From operations in 34 global delivery centres across seven countries, Intelenet provides a broad range of middle and back office services and has a strong customer base of international organisations, predominantly across the financial services, travel, healthcare and telecom sectors.
- This acquisition is in line with Serco's strategy which is focused on driving organic growth, supplemented by strategic acquisitions of skills and capabilities to enter new markets and sectors where we see strong opportunities to enhance our growth and margins.
- The acquisition will:
- Provide access to attractive markets. The international and domestic Indian BPO markets are large, forecast to grow around 15% per annum in the medium term, and have margins reflective of high value services.
- Broaden our customer and geographic reach. In line with our strategy of building a balanced portfolio, Intelenet's diverse and international private sector customer base will
further increase our spread across markets.
- Add to our scale and depth of capabilities. Together with our existing BPO-related operations we will have around 40,000 employees providing transactional, process and voice support, finance and accounting services, and business transformation consulting, making us strongly placed to provide our customers with a broad range of end-to-end business services.
- The total acquisition cost of up to £385m includes contingent payments of up to £50m, and will be fully funded from Serco's debt facilities.
- For the year to 31 March 2011, Intelenet's revenue was approximately £170m and Adjusted operating profit* was £19m.
- Expectations are for Intelenet to continue achieving organic annual revenue growth of 10% to 15% and to maintain its Adjusted operating profit margin*, before net cost synergies, at around 12%.
- The acquisition is expected to be accretive to earnings in the first full year with returns meeting Serco's cost of capital in the third full year of ownership.
- The acquisition is subject to regulatory approval, which is expected in the coming months.
Chris Hyman, Chief Executive of Serco, said: "The acquisition of Intelenet supports our ambitions as a leading global service company. The international BPO market is growing quickly as companies seek out new ways to improve their service and reduce costs. Intelenet's high value capabilities and customer base, together with its economies of scale, means we can access new markets and strengthen our existing propositions. I am particularly delighted that the Intelenet management team will join us to continue driving the business forward. Their passion for their customers and people, and their philosophy of service excellence, means they will be a great asset to Serco."
Susir Kumar, Chief Executive of Intelenet Global Services, said, "We are excited to become part of the Serco family which is strategically aligned to our business. Becoming part of Serco will propel us to our next phase of growth, by helping us to address a wider market and to provide more end-to-end solutions. My management team and employees keenly look forward to working with our new global colleagues. We are grateful for Blackstone, Barclays and HDFC for their tremendous support of the company and we are pleased to be continuing the strong relationship with them as our clients."
Akhil Gupta, Chairman and Managing Director of Blackstone Advisors India Private Limited, added:
"Intelenet becoming a part of Serco will accelerate the adoption of its BPO services by customers around the world. A number of Blackstone's global portfolio companies are amongst Intelenet's diverse customer base. In addition, Blackstone's partnership with management, after what was India's largest management buy-out in 2007, has helped Intelenet to create thousands of jobs. We look forward to continuing our relationship with Serco and management, and are pleased to support the next phase of Intelenet's growth.
Background on Intelenet
Intelenet Global Services Private Ltd (Intelenet) is a leading provider of BPO services. Headquartered in Mumbai, India, it operates 34 global delivery centres across seven countries and has over 32,000 employees, 28,000 of which are graduates.
Intelenet has a strong customer base of international companies in the UK, USA, India and elsewhere around the world. Customers include Barclays, State Bank of India, Travelport, Apria Healthcare, BSNL and Aircel.
Intelenet offers its global customers a broad range of middle and back office services including transactional, process and voice support, finance and accounting services, and business transformation consulting such as process redesign and reengineering. The international BPO business primarily focuses on three vertical markets: Banking, Financial Services & Insurance; Travel, Hospitality & Transport; and Healthcare. As a customer-centric organisation, Intelenet's services tend to be core to the operations of its customers and are often complex and judgement-based.
Intelenet was founded in 2001 as a joint venture between TCS (Tata Consultancy Services) and HDFC (The Housing Development Finance Corporation). In 2007 a management buy-out was completed, resulting in the business being majority owned by Blackstone Group, together with Barclays, HDFC and Intelenet's management team. Today, according to NASSCOM, the trade body and chamber of commerce of the IT-BPO industries in India, Intelenet ranks amongst the top BPO exporters and the leading supplier in the domestic Indian market. Hewitt Associates, a leading global HR consultancy, rank them as one of the best employers in India.
Intelenet competes in its markets against other BPO providers such as Aegis, EXL, Firstsource, Genpact, Infosys, Wipro and WNS, global diversified consultancies such as Accenture and IBM, and more specialist providers such as Convergys, Teleperformance and Xchanging.
Around three-quarters of their revenues are generated from international BPO, with the remainder from the domestic Indian business. Intelenet has an order book of around £500m over the next five years.
Intelenet's revenues for the year to 31 March 2011 were approximately £170m. Revenues have grown organically over the last three years at a compound annual growth rate of 12%. Intelenet's Adjusted operating profit* for the year to 31 March 2011 was approximately £19m. The Adjusted operating profit margin* has averaged 12% over the last three years.
The acquisition of Intelenet will provide access to attractive markets. The size of the addressable global BPO market is estimated at some $350bn to $500bn, according to the Everest Research Institute. Around $200bn of this is currently outsourced, with $40bn being provided internationally. This international BPO market, where Intelenet is strongly placed, is forecast to grow by around 15% per annum. International BPO in India represents around $15bn or 32% of the market. The major source of market growth is anticipated to be serving the US and the UK, with the Banking, Financial Services and Insurance market continuing to represent the largest addressable market opportunity.
The domestic Indian BPO market, where Intelenet is market leader, is forecast to grow by around 20% per annum to $2.5bn in 2014, according to Gartner. India has seen GDP increase by 7% per annum over the last decade, with rising incomes driving demand from customers for services and consequently a growing use of third parties to deliver them. In addition to this growth in the commercial BPO market, there is also emerging demand for process outsourcing within the Indian public services market.
The acquisition of Intelenet will broaden our customer and geographic reach. The business provides services to a large number of private sector customers across a range of sectors and countries. This acquisition furthers our strategy of building a balanced contract portfolio, spread across sectors and geographies. This enables us to select the best opportunities whichever market they are in and to use expertise learned from one market and to take it to another.
The acquisition of Intelenet will add to our scale and depth of capabilities. Intelenet brings a wealth of expertise in a broad range of middle and back office services, and its existing management team will continue to lead the business and drive it forward, supported by a small number of Serco senior leaders.
Since 2009, Serco has been providing customer services, database management and back office services in the Indian BPO market. The combination of Intelenet with our existing BPO-related operations marks a significant step change in our global capability and capacity to deliver value-adding services across the world. Our combined BPO-related operations will have 40,000 employees providing services across seven countries. With these economies of scale and capabilities, we will be strongly placed to provide existing and new customers with a broad range of high quality end-to-end services.
Under the share purchase agreement, the total acquisition cost, including the assumption of existing debt, is up to £385m. This includes contingent cash payments of up to £50m through to December 2013. These are dependent principally on the delivery of additional revenue to Intelenet from Blackstone portfolio companies and Barclays.
The acquisition cost, depending on the level of contingent payments, represents a multiple of 17.6 to 20.3 times Adjusted operating profit* and 10.5 to 12.0 times EBITDA for the year to 31 March 2011.
The acquisition will be fully funded from Serco's debt facilities. The expected funding cost of the acquisition will be around 5%. For the year to 31 December 2010, Serco's financial covenant leverage ratio based on consolidated total net borrowings to EBITDA was 1.1 times. Taking into account on a pro forma basis the initial cash consideration and earnings of Intelenet for the year to 31 March 2011, this ratio would have been 2.0 times.
It is anticipated that Intelenet will continue to achieve an organic revenue growth rate of 10% to 15% a year, with the medium term likely to present additional revenue synergies. The Adjusted operating margin*, before net cost synergies, is expected to remain approximately 12%, in line with recent years.
Transaction costs charged in the first year will be approximately £3m. It is anticipated that a similar amount of integration costs will also be incurred, spread over the first and second year. Following the initial integration programme, net cost synergies are expected to grow to approximately £5m per year, driven principally by the integration of Intelenet with our existing India-based BPO operations.
The acquisition is therefore expected to be accretive to earnings in the first full year of ownership. The returns are expected to meet Serco's group cost of capital in the third full year of ownership.
* Adjusted operating profit and margin is before the amortisation of intangibles arising on acquisitions, and acquisition transaction costs.
Relevant figures in this release have been converted at an exchange rate of INR 72 to the pound.
For further information please contact Serco:
Analysts and investors - Stuart Ford, Head of Investor Relations T +44 (0) 208 334 4122
UK media - Dominic Cheetham, Director of Corporate Communications T +44 (0) 208 334 4334
India media - Marcus De Ville, Head of Media Relations T +44 (0) 773 889 8550
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