Overview:
On April 06, 2019, Baring Private Equity Asia announced that it will acquire c.30% stake in NIIT Technologies from the promoters NIIT Ltd., Pawar family, and Thadani family, for $381m. Baring PE is also launching an open offer to purchase up to 26% additional shareholding at INR 1,394 per share, as per SEBI rules. This will take their total possible ownership to 56% for a total consideration of up to $709m.
Rajendra Singh Pawar, co-founder and chairman of NIIT Technologies, mentioned in an analyst call that this transaction is part of the succession plan that has been in the works for some time – the company also changed its leadership when it appointed Sudhir Singh as the CEO last year. Baring PE is expected to back and accelerate the strategic growth plans put together by Sudhir and his leadership team.
Company performance:
NIIT Technologies primarily focuses on Insurance and Travel verticals, which contribute over 50% of the revenue. The company’s revenues have grown 6.3% over the last 3 years, with EBITDA margins in the range of 17-17.5%. NIIT’s overall strategy has been based on a 3x3 matrix consisting of three key verticals – insurance, BFS, and travel – and three core capabilities – data, cloud, and automation. Its recent transactions – acquisition of WISHWORKS, acquisition of RuleTek, and divestment of ESRI – have been in line with this strategy.
Transaction overview:
The transaction values NIIT Technologies at $1.1bn – representing an EBITDA multiple of c.13.3x. This is at par with the valuation of Indian IT services companies, which are trading between 12.0-16.0x EBITDA. The per share purchase price of INR 1,394 represents a premium of 5.9% over the company’s average 60 day share price on prior to announcement date.
The large transactions in the technology services industry have seen similar valuations – L&T Group group’s acquisition of 20.32% stake in Mindtree was at 15.0x EBITDA multiple; the merger of KPIT and Birlasoft was at 10.0x EBITDA; and KKR sold Aricent at 10.4x EBITDA.
Baring itself acquired another mid-cap Indian IT services company – Hexaware – in 2013 at 8.3x EBITDA. There is obvious speculation that Baring may merge NIIT with Hexaware, which would create a large-cap IT services company with a combined revenue of c.$1.2bn.
Over the last few years, the Indian IT sector has seen its growth and margins come under pressure from the slowdown in traditional outsourcing services and changing business models. Certainly a consolidation in the sector would help mid-market companies such as NIIT and Hexaware compete effectively not only with giants such as TCS and Infosys, but also with global players like Accenture and EPAM.