PE Firms Cringe At Firstsource Price Tag

By Reuters

  • 06 Oct 2008

Private equity firms are starting to team up to bid for a $400 million stake in India's Firstsource Solutions, sources familiar with the matter said, amid concerns that the price of the deal is too high.

Apax Capital Partners, Blackstone Group and Providence Equity Partners are among the firms looking to bid for the stake that could total 88 percent in the back-office firm, the banking sources say, though it is still not clear which firms will join together.



First round bids are expected in the next few weeks.


While India's back-office industry is attractive to private equity investors seeking steady cash flows and strong business prospects, sealing a deal is tough amid the market turmoil.



Shares in Firstsource, founded by ICICI Bank, fell on Monday to 26.30 rupees ($0.55), their lowest since the firm went public in February 2007. The stock has lost nearly a third in the last three months and more than 60 percent in 2008.



That may not be the only obstacle. Firstsource has a $275 million bond convertible into equity by 2012 at treble the current price.


"The bond holders have the right to veto any large stake sale. But there are ways to sidestep it. One way is to pay them back," a banker involved in the deal said, but this would add to the acquirer's cost.



Firstsource also posted a $10.6 million loss in the June quarter and has said U.S. credit woes have hurt its operations, which are among factors expected to reduce offers for the stake, three bankers involved in the deal said.

Queueing up to sell their holdings are ICICI, India's second-largest bank, Singapore-owned Temasek's Aranda Investment and U.S.-based banking technology group Metavante, all financial investors.



Collectively they own 68.3 percent of Firstsource and banking sources said they were looking at 64 rupees a share, the same as the IPO price in early 2007, valuing the firm at $580 million. Goldman Sachs is advising all the sellers.


A deal is more likely below 50 rupees a share given the state of the market and the languishing stock price, the sources said.


Any sale would also include an open offer for another 20 percent to conform to Indian regulations.




The sale comes as ICICI Bank, which owns about a quarter, grapples with interest rates at a seven-year high, slowing loan growth and the dwindling value of its overseas holdings.


ICICI Bank's June quarter net profit fell for the first time in at least five years and analysts expect the bank to book $200 million in bond losses in the September quarter.


"We do not comment on market speculation in this respect," a spokesman for ICICI said in response to a query about plans to sell its holding. "ICICI Bank holds investments in a variety of companies including Firstsource and evaluates its options with respect to those investments on an ongoing basis," he said.


Officials at Apax, Blackstone and Providence declined comment.

Blackstone already controls back-office firm Intelenet Global Services and would want to consolidate its operations with Firstsource, which at one point was reported to be eyeing Citigroup's Indian back-office operations.


Media reports have said Kohlberg Kravis Roberts& Co and ICICI Ventures, a unit of ICICI Bank, were also interested in the stake.


Bankers said an agreement for the sale could be reached before November. Sequoia Capital, which owns 4.6 percent could also sell out, one source said.


"The timing for the agreement boils down to the price. The controlling stake is juicy enough and bidders are aplenty to command a premium, but the asking price is way too high," said one banker who is heading a private equity firm's bid.


Firstsource has 36 centers with 18,500 employees across India, the United States, the United Kingdom, Argentina and the Philippines. It reported a revenue of $332.4 million in 2007/08, according to its website.


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