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Blackstone's Stake in Mphasis Up for Grabs as PE Giant Mulls Exit

Jan 5, 2021 11:17 AM 4 min read

At least four major private equity (PE) giants are reportedly in a race to acquire a controlling stake in Mphasis, the Bengaluru-headquartered IT services company that was bought by the Blackstone Group in 2016.

A buyout of Blackstone’s 56.16% stake in Mphasis could cost c. ₹16,000cr ($2.2bn) based on the latter's ₹28,598cr ($3.9bn) market value. But it might trigger the sale of an additional 26% of the company, giving the acquirer an 80%+ stake in Mphasis for ₹22,900cr ($3.1bn).

This would signify Blacksone’s biggest payday in India. The Mphasis acquisition cost c. $1.1bn - the largest investment Blackstone had made in the country. The deal has paid off handsomely for the world’s largest PE firm, with Mphasis having seen its share price rallying nearly 66% in the past year and 3x since 2016.

Presently, Brookfield, Carlyle, Bain Capital and Permira are eyeing Mphasis. The four funds are expected to submit their final binding offers next month. But before we get into that…

A Little Bit of History

Mphasis, which was founded in 2000, is a major Indian IT company. It provides IT services, architecture guidance, application development and integration, and application management services.

In 2008, Hewlett-Packard (HP) reached a deal with Electronic Data Systems (EDS) to acquire the latter for $13.9bn. Earlier, EDS had acquired a 52% stake in Mphasis in 2006 for $380m, which meant that HP inherited the majority interest in Mphasis.

The HP era saw Mphasis stagnate. Revenues dropped, sales fell and shares plateaued. There was a sentiment that HP had overpaid and thus there was also more pressure on Mphasis to deliver. At one point, the IT firm saw three CEOs come and go in a span of merely 18 months.

By 2012, the parent company faced difficulties of its own, further affecting Mphasis, since more than half of its business came from HP at the time.

Blackstone bought HP’s 60.5% majority stake in Mphasis in 2016 for about $1.1bn and had big plans for it considering its high quality customer base and cash flow generation potential. Soon, Mphasis saw its fortunes improve.


The Blackstone Turnaround

Before its entry, Blackstone did two crucial things that helped turn things around for Mphasis. One, it inked a long-term contract with HP which, while under stress, was still Mphasis’s largest customer. Two, it brought with it a wide array of global portfolio companies as new customers. These included the 11 companies Blackstone secured from an earlier investment in IT firm Intelenet.

Blackstone set about diversifying Mphasis's client list and business operations. Reliance on business from former parent HP ws brought down to 16% even as business from non-HP "Direct Channel" sources expanded to 82% of total billings.

Meanwhile, Blackstone built on the company's core BFSI strength but also furthered its investment in new digital and cloud-based offerings, including automation and AI. This included the acquisition of London-based data engineering firm Datalytyx.

Additionally, while 91% of business earlier came from the US and Europe alone, today “other markets account for 30%.

These steps paid off well - Mphasis’s share price has consistently stayed at double the price at which Blackstone bought it and has surged throughout 2020 (see image below). And over that time, Blackstone has opportunistically adjusted its position by buying and selling in the equity markets, ending up with a 56.16% interest now. Revenue growth has registered an all-time high of 22% while operating margins have improved by over 3% and cash flow has reached $138m.

Blackstone's Stake in Mphasis Up for Grabs as PE Giant Mulls ExitThis makes Mphasis an attractive investment for large funds. Which brings us to…


The Race to Acquire Mphasis

Now, there may be two points that might work against Mphasis and be used as leverage by the four PE funds eyeing a commanding stake. One, Mphasis reports gross margins between 25-30% while global high-end digital companies hover around 40%. And two, its robust market rally has made its stock quite expensive. As per market grapevine, this has already turned away other potential buyers, including Apollo Global Management, Tech Mahindra, TPG, KKR and Apax Partners.

But the aforementioned four interested funds - Brookfield, Carlyle, Bain Capital and Permira - have sufficient capital for the purchase + likely expect a windfall from their investment + do not have much tech exposure in India and are thus eager for large-ticket deals. The last point is important to note, since India’s much-competitive and much-sought-after tech space offers plenty of opportunities.

That's not to say these funds haven't yet made a bet on India. Carlyle has already deployed over $3bn in the country and has been actively buying into or out of firms in the pharma, healthcare, tech and financial services sectors. Only last month, Brookfield paid $450m for BPO platform Everise. Bain Capital exited Genpact only last year and owns a stake in engineering firm QuEST Global Services. It is only for UK PE fund Permira that acquiring Mphasis would mean an India debut.

So, for lack of a better word, it’s safe to assume that all interested parties will make their pitches as Mphatically as possible.


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