Citigroup has opened talks with prospective bidders, including IBM Corp. for selling a strategic stake in its Mumbai-based captive business process outsourcing (BPO) arm Citigroup Global Services Ltd, earlier e-Serve International.
While additional details of the stake sale plans weren’t available, based on current annual revenue estimates ranging from $300 million to $400 million (Rs1,230 crore to Rs1,640 crore), industry sources estimate the unit could be valued at over $1 billion.
Citigroup India chief executive officer Sanjay Nayar declined to comment on the development, saying the bank’s policy is not to respond to market speculation, but people familiar with the development and who didn't want their names used said, “Citi has started feeling the market for a strategic stake sale. The process has started and it may take a while before concluding the deal.”
They also said the conglomerate will not go for a complete sell-off. An IBM spokesperson in India said: “We do not comment on speculation and rumours.”
Industry watchers are keeping a close eye on the structure of the deal. One person close to the bank, who did not want to be named, said Citi is exploring the possibility of structuring the deal along the lines of the 2004 IBM-Bharti Televentures outsourcing deal.
In March 2004, IBM took over Bharti’s information technology operations in return for assured revenues of up to $750 million over a 10-year period. “There could be a similar arrangement whereby IBM would run Citi’s BPO operations for a fee. In addtion to that, it could pick up a strategic stake (in Citigroup Global Services),” this person said.
Another person said a Genpact-like deal could also be a possibility. “Citi wants to monetize its investments in the BPO outfit,” he said. In November 2004, General Electric Co. sold a 60% stake in its erstwhile Gurgaon-based captive BPO to private equity investors General Atlantic and Oak Investment for $500 million.
After Mumbai-based WNS Holdings in 2002 and Delhi-based Genpact in 2004, Citigroup Global Services now becomes the third major captive BPO unit in India to sell out under pressure to compete with more cost-competitive third-party outfits.
Captive BPOs are typically 30-40% more cost-intensive than their third-party peers.
Incidentally, just seven months prior to the Genpact deal, Citigroup consolidated its holding in Citigroup Global Services, taking its shareholding from 44.4% to 92.26%. At the time, Citigroup Global Services’ revenues stood at $94 million, according to the company’s website. In November last year, it formally changed its name from e-Serve International to Citigroup Global Services as part of an exercise to further incorporate the BPO outfit with its overall operations in India. It now holds 100% stake in the arm.
The move to offer a strategic stake in the BPO arm comes close on the heels of Citigroup CEO Charles Prince’s announcement in April about the cutting of 17,000 jobs in the US as part of a cost rationalization exercise.
Citi expects to save $2.1 billion this year as a result of these job cuts. About 8,000 of these jobs are expected to be moved to India and a sizeable number will go to Citigroup Global Services.
The captive BPO already employs over 8,000 people in India. It currently provides financial and banking customer support services to Citigroup’s worldwide operations out of two centres, one each in Mumbai and Chennai. The BPO is also in the process of setting up a large centre in the National Capital Region.