Global Economics

India's Essar to Buy U.S. Outsourcing Firm


Essar will pay $250 million for Nasdaq-listed PeopleSupport, which it will combine with its own outsourcing unit Aegis

India's Essar Group is to buy Nasdaq-listed PeopleSupport, a business process outsourcing (BPO) firm headquartered in California, for $250 million. The acquisition will be executed by Essar's subsidiary Aegis BPO, which will merge PeopleSupport into its unlisted subsidiary Essar Services (Mauritius).

PeopleSupport shareholders will be paid $12.25 per share in cash, representing a premium of around 29% over PeopleSupport's closing share price on August 1, the last trading day prior to the takeover announcement, and a premium of approximately 42% over the average trading price of PeopleSupport's shares during the previous 30 trading days.

PeopleSupport has no debt on its books. For calendar 2007 it had revenues of $140.6 million, up 28% compared to 2006 and net cash from operations of $27.9 million, up 24% compared to 2006. On a trailing basis, the deal is being done at a firm value to sales multiple of 1.78 times and a net cash multiple of 8.96 times.

But PeopleSupport's operating margins have been depressed by the appreciation of the Philippine peso relative to the US dollar and were down to 3% in 2007, compared to 10.7% in 2006.

PeopleSupport announced financial results for the second quarter of 2008 on August 4 showing a growth in revenues to $36.4 million, a 6% increase over the same quarter of the previous year, and resulting in revenues of $72.09 million for the first six months of 2008. But PeopleSupport made a net loss of $23.1 million for the six months, compared to a net profit last year, due to the impact of higher salaries, increased facility costs and the Philippine peso appreciation over the period.

PeopleSupport offers customer management, transcription and captioning, and other BPO services to its clients. It was founded in 1998 by Lance Rosenzweig, currently chairman and CEO, and was listed on Nasdaq in October 2004 at $7 a share. Since then it has grown into one of the largest outsourcing firms in the Philippines, with around 8,000 employees.

PeopleSupport said on an analyst call recently, details of which are posted on www.seekingalpha.com, that its "strategic clients" (which contribute more than $10 million in annual revenues) are Expedia, Washington Mutual, JPMorgan and a large travel client. It added that, for the first quarter of 2008, 62% of its revenues were accounted for by these four clients.

PeopleSupport rejected a higher offer from Philippine outsourcing firm IPVG Corp and Asian private equity firm American Orient Capital Partners in January, saying it was unable to evaluate the offer in the absence of firm financing commitments.

Aegis currently has 25 delivery centres in India and the US. The acquisition will give it a presence in the Philippines and Costa Rica and cement its position in the US. Its last fiscal year revenues were around $320 million derived from clients in the telecom, banking, insurance and healthcare sectors. The Aegis-PeopleSupport combine will have 29,000 employees.

Aegis is advised by UBS and Edelweiss Capital with legal advice provided by Shearman & Sterling. Credit Suisse is advising PeopleSupport with Pillsbury Winthrop Shaw Pittman providing legal advice.

Aegis is part of the Essar Group, a diversified conglomerate with business interests in steel, energy, power, communications, shipping and logistics, and construction.

In tandem with a number of Indian conglomerates, Essar Group has been on an aggressive globalisation drive. In April last year it paid $1.58 billion for Algoma Steel, an integrated steel producer based in Ontario. Then in January this year Essar Oil bought 50% of Kenya Petroleum Refineries for an undisclosed amount, which was speculated to be up to $750 million.

But Essar had to abandon its most recent cross-border M&A deal for US steelmaker Esmark. On April 30 Essar entered into an agreement to buy Esmark for $1.1 billion and Esmark's board endorsed the offer. But Esmark's labour union wasn't happy with the arrangement and exercised its right to bring an alternative buyer to the table. The union found Russian steel major Severstal which made a competing bid for Esmark in June and forced Essar to raise its offer to $1.18 billion. In the end, Esmark's largest institutional shareholders backed the Severstal bid and, on June 25, Essar withdrew its offer. Yesterday, Severstal announced that it had successfully cornered 94% of Esmark's shares.

PeopleSupport's shares gained 25% on Monday to close at $11.95. The upward trend continued in early trading yesterday.

Anand is a writer at FinanceAsia.com.

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