Citigroup is keen on selling an 80% stake in Mumbai-based captive business process outsourcing (BPO) arm Citigroup Global Services (formerly eServe International) for $700-750 million (Rs2,870-3,075 crore) and is in advanced negotiations with leading private equity investors for an all-cash deal.
While a Citi spokesperson declined to comment on “market rumours and speculation”, investment bankers close to the transaction, who didn’t want to be named, said that a private equity investor is most likely to emerge as the buyer and strategic suitors, such as IBM Corp. and Tata Consultancy Services Ltd, (TCS) are likely to drop out of the race over terms being proposed by the seller. Details on the private equity (PE) firms in the running for Citigroup Global Services couldn’t immediately be ascertained.
“Unlike the Genpact deal, Citi is not willing to commit long-term business to the captive once a new shareholder comes in. Neither IBM nor TCS would be willing to put so much cash down without that commitment,” said one banker. When General Electric Co sold 60% in its Gurgaon-based captive BPO to PE firms General Atlantic and Oak Investment for $500 million, it also threw in a multi-year outsourcing contract as part of the deal.
People in the industry say GE’s contract with Genpact runs into 10 years. Citi’s best offer, on the other hand, is a three-year contract, said a person close to the deal.
Citigroup Global Services operates primarily in back-office processing of financial services. It employs about 8,000 people. The financial services sector accounts for nearly 60% of the $8 billion Indian BPO industry’s annual revenues. Players such as IBM and TCS also focus heavily on the space in their respective BPO operations here and Citigroup Global Services would, in theory, be an ideal buy to scale up operations quickly.
But without a multi-year business contract from Citi, it will be difficult for even an IBM to hawk its services in the US market, which again accounts for over 60% of the BPO industry’s revenues.
“Large banks in the US will be apprehensive about outsourcing core processes to a Citi-owned outfit. They may eventually come around but, in the interim, Citigroup Global Services needs captive business from Citi to tide over the transition period,” said one person familiar with the transaction.
The market values the Citigroup outfit at $1-1.5 billion, based on revenues of $300-400 million. In April 2004, Citi consolidated its holding in the company from 44.4% to 92.26%. It now owns 100%.
In November, it changed the name to Citigroup Global Services from eServe International. As consolidation in the BPO sector gains ground, Citi is under increasing pressure to close the deal before valuations begin to taper off. On Monday, PE firm Blackstone Group backed a $200 million management buyout of Mumbai-based Intelenet Global Services Ltd, which was 100% owned by Indian mortgage major Housing Development Finance Corp. and the UK’s Barclays Bank Plc.