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NIIT Technologies Ltd – Promoters exit, full valuations
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What’s the deal?

Baring Private Equity Asia entered into an agreement with NIIT Ltd and other promoters to acquire their 30.2% stake in NITEC (NIIT Ltd: 23.22%, Pawar family: 3.49%, Thadani family: 3.49%) – all promoter group entities) at Rs 1,394/share (for a consideration of Rs 26.3bn) – at 4% premium to last closing price.
As per the SEBI rule, Baring PE Asia made an open offer to acquire up to 26% of share capital of NITEC from its minority shareholders at Rs 1,394/share (for a consideration of Rs 22.6bn). Both the transactions are subject to approval from Competition Commission of India and Anti-trust authorities in US and Germany.

 

Shares Quantity (In mn)

Share%

Price

Amount (In Rs mn)

Direct

18.85

30%

1394

26277

Open Offer

16.23

26%

1394

22623

Total

35.08

56%

 

48900

 

Trend continues, expect more transactions in IT midcap space

Many midcap IT companies will find it difficult to sustain growth, at their size and level of competence – and hence we would see heightened M&A activity in this space. Over the last few years, companies like Polaris, Geometric, KPIT, Mphasis, Hexaware and NIIT Technologies have either been acquired by strategic/financial investor, or have merged with another IT company. We believe with size becoming an important factor driving growth, and many midcap companies with low promoter holdings suffering from succession planning issues – there could more M&A activity in the IT midcap space.

Below is the peer comparison of the recent Midcap IT companies with M&A interest.


 

5-year Avg Operating Margins

5 Years CAGR Sales Growth

Mindtree Ltd

17%

18.3%

Hexaware Technologies Ltd

18%

15.1%

Larsen & Toubro Infotech Ltd

19%

13.7%

NIIT Technologies Ltd

16%

8.2%

 

What’s in there for NIIT Limited shareholders?

The proceeds from the stake sale in NIIT Technologies would increase the chances that the board might distribute the majority portion of cash to shareholders in terms of dividends or share buyback. The remaining portion of cash proceeds could be used for acquisitions, investments to expand business and debt repayment, which is not specified by the company’s management yet.

Additional announcements

Acquires Digital consulting firm Whishworks:

NITEC acquired Wishworks IT Consulting Private Ltd. — a Hyderabad-based firm specializing in Mulesoft and Big Data Technologies for USD 41.6mn. Company has 250 employees. According to Indian GAAP, its revenues have increased from INR587m in FY16 to INR991m in FY18 (30% CAGR). As part of the deal, NITEC will acquire 52.67% in the first tranche and the remaining 47.33% over the next two years.

Divests its entire stake in ESRI India

NIIT tech signed a definitive agreement for the sale of its entire 89% stake in ESRI India Technologies Ltd (Formerly NIIT GIS Ltd.). GIS constituted ~4% of NITEC’s revenues as at 9MFY19. Total consideration for the same is INR897m. ESRI India had been an exclusive distributor of ESRI Inc for GIS products in India and has been supporting customers since 1996. The distribution agreement was expiring on 31st March 2019 and ESRI Inc expressed its desire to directly manage the distribution of its products in India.

Will Baring PE merge Hexaware and NIIT technologies?

Baring PE Asia is also the promoter of Hexaware (wherein it holds 63% stake) which operates in the similar segments as that of NIIT Technologies. However, as part of the deal, Baring PE Asia will not merge the two companies (NIIT Technologies and Hexaware) at least for the next two years. Also, Baring PE Asia intends to continue with the same management team of NIIT Tech.

Conclusion

The promoters’ exit in NITEC was largely expected. The stock price action had also been showing signs of the same. At acquisition valuations, we believe it will be a difficult task for Baring to derive meaningful returns from this investment. Unlike Hexaware, which it had acquired at 10x one year forward PE – this appears expensive. However, on the positive side a strategic investor will pacify concerns of management continuity and business disruptions. There is not much left for investors as CMP is pretty close to the deal price of 1394.

 

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