The RP-Sanjiv Goenka Group has struck a deal to acquire public listed BPO firm Firstsource Solutions Ltd through a mix of subscription to fresh issue of shares and stake purchase from existing investors including Singapore’s sovereign wealth fund Temasek. The two-tier transaction, which is being executed through an arm of public listed power generation firm CESC, has also triggered an open offer, which could cost as much as Rs 640 crore ($119 million).

In the first leg of the deal CESC’s wholly owned arm Spen Liq Pvt Ltd is buying around 35 per cent stake in Firstsource through subscription of fresh shares worth Rs 275 crore ($51 million). This would be used by the company to redeem outstanding foreign currency convertible bonds (FCCB).

Simultaneously Sanjiv Goenka-led RPG Group is also acquiring 15 per stake of the diluted capital base of the public listed Firstsource from three large shareholders ICICI, Temasek and Fidelity. The three investors, who hold around 18-19 per cent stake each as of now, would sell 5 per cent each of the diluted capital base to RPG for around Rs 40 crore each.

The RPG Group firm has also made an open offer to buy another 26 per cent stake of Firstsource which if fully successful could cost around Rs 240 crore.

The open offer price has been set at Rs 12.2 a share. Firstsource scrip rocketed 7.6 per cent to close at Rs 14.24 a share or 16.6 per cent more than the offer price on the BSE on Thursday. The preferential allotment is at Rs 12.1 a share.

CESC scrip, however, tanked three per cent on Thursday possibly due to investment in an unrelated area. CESC is a cash rich firm which had reserves of around $700 million as of March 2012. In contrast, Firstsource is a mid-sized BPO with low margins.

It was set up in 2001 by ICICI Bank as ICICI InfoTech Upstream Ltd and over the years struck over half a dozen deals to grow globally. It also attracted investments from names such as WestBridge (which later came under Sequoia Capital banner only to move out a couple of years ago) and Temasek.

The firm which went public in 2007 clocked revenues of Rs 2,255 crore with net profit of Rs 62 crore for the year ended March 31, 2012. The deal pegs a post money valuation of around Rs 853 crore or 13.7x its FY12 earnings.

The BPO serves across different verticals like banking financial services and insurance (BFSI), telecom, media and healthcare. It has over 30,000 employees as present.

This comes as yet another M&A deal in the BPO sector besides Tech Mahindra’s acquisition of Hutchison Global Services, Serco’s acquisition of Blackstone controlled Intelenet last year and Xchanging’s deal for Cambridge’s BPO business.

For RPG Group, which saw brothers Harsh and Sanjiv Goenka formally split to strike out their own business groups a couple of years ago this is one of the first big acquisition moves. Although it is not unnatural for the cash rich flagship CESC to deploy its funds for such expansion, the group management would have to do some explaining on why a power generation firm is acquiring a BPO firm.

Temasek’s loss making bet

For Temasek, Firstsource is one of the investments it would rather like to forget. The sovereign wealth fund of Singapore government had invested around $45 million in the company during 2004 and 2006.

Its average acquisition cost of shares is pegged at over Rs 22 a share so its part exiting at just about half the cost after almost eight years into the investment.

Temasek held 25.8 per cent stake in the company at the time of its IPO in 2007. Currently it owns 18.8 per cent and is selling over a third of its remaining stake in the part exit.

(Edited by Prem Udayabhanu)

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