Xchanging unveils $144 million India M&A deal

The London-listed firm will acquire 75% of Indian outsourcing company Cambridge Solutions in a deal part-financed by Lloyds TSB.
London-listed Xchanging will acquire up to 75% of Cambridge Solutions, an India-headquartered business process outsourcing (BPO) firm and information technology services provider, at an estimated total consideration of around ú83 million ($144.5 million). The payment will be split into two parts: Rs3.7 billion ($77.2 million) in cash and an issue of 15.2 million new Xchanging shares.

Xchanging has launched an open offer to acquire up to 20% of the free float of Cambridge Solutions at a price of Rs81.11 per share. Any Cambridge shares acquired via the offer will reduce the number of shares Xchanging will acquire from key Cambridge shareholders with whom it has entered share purchase agreements.

The two firms are already linked on the business side since Cambridge Solutions' Indian operations have for the past two years been providing services to an Xchanging partnership called Xchanging Broking Services. The two firms also cooperate on the development of IT infrastructure and joint sales opportunities.

Cambridge Solutions is 61.4% owned by Scandent Holdings Mauritius. In 2005 ScandentÆs listed subsidiary Scandent Solutions merged with Cambridge Services to form Cambridge Solutions. Scandent Solutions was promoted by Chris Sinclair, a former chairman and CEO of Pepsi-Cola; Satyen Patel; Rajat Gupta, former worldwide head of McKinsey; and other financial investors. After the merger, Sinclair took over as executive chairman and CEO of Cambridge Solutions while Patel became executive vice-chairman.

Sinclair and Patel will resign from the Cambridge board once the deal is completed û it is estimated to close in the second quarter 2009 û though Xchanging indicated it intends to appoint Sinclair as an adviser to assist with merger integration as well as business development. Xchanging will replace the two directors with David Andrews and Richard Houghton.

Sinclair and Patel have agreed a non-compete with Xchanging for a period of one year from the date of their resignation, for which they will be paid ú2.3 million.

Scandent Holdings was advised by Standard Chartered. Xchanging was advised by Citi, with UBS acting as joint broker.

Cambridge Solutions is currently listed on the Bombay, National, Madras and Ahmedabad stock exchanges in India and Xchanging intends to keep it a listed company. It has offices in eight countries across four continents, approximately 4,500 employees and provides BPO services in the USA, Australia and India.

The per share price of Rs81.11 represents a premium of 36.3% over the closing price last Friday, the last trading day before the acquisition was announced. Cambridge gained a further 5% yesterday to Rs65. Indian markets were volatile yesterday with the Mumbai Sensex index swinging almost 700 points intra-day, before finishing below the psychological 12,000-point level again. The closing level of 11,695, represented a gain of 106 points from Monday.

Xchanging is a business processing company with a focus on the insurance and financial markets. It was created in 1999 and did an initial public offering in 2007. It now has over 4,300 employees with operations in seven countries and customers in 35.

The acquisition of Cambridge Solutions provides Xchanging with processing capabilities in the US, a BPO platform with offshore critical mass in India and an Australian business that will be a platform for Xchanging's growth in the region. Around 70% of Cambridge SolutionÆs revenues are from the US, 17% from Australia, and the balance from the rest of the world including Europe.

For the year ended March 31, 2008, Cambridge Solutions had revenues of Rs12.4 billion, down 16% from the previous year. The majority of the revenues, or 73%, were derived from the BPO business and the balance from IT services. Cambridge earned an Ebitda for the same year of Rs944 million.

In the year ended December 31, 2007, Xchanging grew its revenues 19.0% to ú468.2 million, on which it posted an operating margin of 6.8%. Based on the latest fiscal year numbers, Xchanging's revenues will increase by 31% with the Cambridge acquisition.

Xchanging said it expects the takeover to be accretive to earnings before one-off costs in the first full year after completion and to generate a return in excess of Xchanging's cost of capital from 2010 onwards.

Xchanging will fund the deal through a combination of existing cash resources, which totalled ú106.1 million at the end of June, as well as a new ú90 million bank facility with Lloyds TSB. It intends to draw down ú40 million, of which ú22 million will be used to refinance part of Cambridge Solutions' existing debt.

Xchanging's share price closed at ú2.43 on Tuesday, up around 3%. The London Stock Exchange suffered its worst fall ever on Monday, with the FTSE 100 losing 8%, the same day as the Dow Jones index went below 10,000 points for the first time since 2004 to close at 9,985. The FTSE recovered 0.5% on Tuesday, but bank stocks and sentiment remained weak.

It is not yet clear how the meltdown in financial markets will impact the outsourcing of services to countries such as India. ôOn the one hand, companies will be under even higher pressure to control costs and will be eager to explore further opportunities to outsource,ö says an industry specialist. ôBut on the other, outsourcing requires senior management time to be successful and in the current environment, managers may have their attention focused elsewhere, so it's difficult to predict how this will play out.ö
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