Blackstone makes a partial exit from Mphasis
Updated: Jun 15, 2018
On May 14, 2018, Blackstone, the global Private Equity giant, sold 8% of its stake in Mphasis through block deal on NSE. This is the firm’s second partial exit from the IT services company – it had previously participated in the buyback completed by Mphasis in June 2017. Blackstone had acquired a 60.4% stake in Mphasis from Hewlett-Packard Enterprise (HPE) in September 2016 at a price of INR 430 per share, paying a total of INR 5,466cr (c.$820m). It had also launched an open offer to buy an additional 26% stake at INR 457 per share, which did not succeed primarily because Mphasis shares started trading at a higher price after the transaction announcement.
Both the exits have generated high returns for Blackstone. The buyback price in June 2017 was at INR 635 per share for a total value of over $100m – generating an IRR of over 75% for the firm in USD terms. The recent share sale was at INR 960 per share for a total value of c.$220m, an IRR of c.60% over its initial investment. The remaining shareholding of Blackstone in Mphasis of 52% is valued at c.$1.6bn as of May 15, 2018, IRR of over 69% over its initial investment.
Prior to the Blackstone acquisition, Mphasis was trading at 8-10x LTM EBITDA compared to the peer average of 12-14x EBITDA. Currently, Mphasis is trading at 16-17x LTM EBITDA revenue, slightly higher than the peer average of 15-16x LTM EBITDA.
Prior to the acquisition, Mphasis’ revenues and profitability were declining due to large dependency on its parent HP, whose business itself was in a declining phase – between FY 12 and FY 16, revenue had fallen from $1.1bn to $930m. In FY 18, the company has been able to realize growth of over 12% y-o-y – above the industry average of 7–8%. The growth has largely been driven by two factors. First, Mphasis has been able to effectively exploit the opportunities within Blackstone portfolio companies. Second, the company has been able to stabilize its business from its legacy HP business – the Blackstone deal came with a commitment from HP to contribute a minimum revenue $990m over 5 years. With the merger of HP with CSC to form DXC Technology, Mphasis has been able to grow revenues from HP / DXC by identifying new revenue streams within the combined business. In FY 18, the HP / DXC business contributed over 26% of the overall revenue.
Mphasis has turned around from a company that was seeing its revenue decline for over 5 years during FY 12–17 to a company that is growing at above industry level. It recently unveiled its new logo and brand identity that symbolizes this transformative journey. The change in its tagline from ‘Unleash the Next’ to ‘The Next Applied’ which can be thought to refer the shift from developing the requisite capabilities and stabilizing business to now utilizing the capabilities in order to realize the growth potential.