Wipro wins $1.1 billion deal from ATCO, buys its IT services unit

Bangalore: India’s third largest software services exporter, Wipro Ltd, has won a $1.1 billion outsourcing contract—its largest ever—from ATCO Ltd and, in the process, also bought the information technology (IT) services business of the Canadian logistics and utilities firm for $195 million.

The contract, which has been bundled with the back-office IT business of ATCO, is expected to result in additional annual revenue of about $112 million and comes at a time when Wipro is struggling to keep pace with larger rivals such as Tata Consultancy Services Ltd (TCS).

As part of the deal, Wipro will also absorb about 500 IT employees of Alberta, Canada-based ATCO, which is one of the country’s largest logistics and utilities firms. ATCO I-Tek, ATCO’s IT services business, currently has about 700 employees.

“(This deal) gives us access to geographies where it important for us to have significant local capability and presence to provide services,” said Anand Padmanabhan, head of Wipro’s energy and utilities business, during a conference call with reporters.

“Most of these (ATCO) employees come with significant domain knowledge and presence in those markets, which will enable us to provide a lot of services to utilities firms in (North America and Australia),” he added.

This is Wipro’s second large acquisition in the energy and utilities sector after it bought SAIC’s US-based oil and gas IT services business for $150 million.

As part of the ATCO contract, Wipro will provide infrastructure management, application development and maintenance, asset management, among other things.

The deal is expected to start contributing to Wipro’s earnings sometime during the July-September quarter after the completion of the acquisition, Wipro executives said during the conference call.

This is not the first time that ATCO has outsourced work to Wipro. In 2009, Wipro had signed a five-year contract with ATCO I-Tek for business process outsourcing (BPO) services.

The 10-year deal is expected to help Bangalore-based Wipro expand and strengthen its presence in oil and gas-rich countries such as Canada and Australia. and boost revenue from energy firms.

The transaction comes less than a year since Wipro bought US-based Opus Capital Markets Consultants Llc for $75 million.

Experts tracking Wipro said that the deal would help Wipro gain some momentum going into the September quarter and may result in a more positive growth outlook for the second half of the year.

Earlier this year, Wipro had forecast a weak June quarter, but also predicted that the company would see a strong pick-up in the remaining three quarters.

“We view this deal positively. This deal would have been in discussion for some time and would have contributed to the management’s positive outlook over the past few months—culmination of this deal lends more credibility to the management outlook,” analysts Anantha Narayan and Nitin Jain of Credit Suisse wrote in a research note.

Shares of Wipro rose as much as 3.2% in morning trade on Friday to ₹ 554.90 after the announcement. They pared some of the gains to close up 1.83% at ₹ 547.70 on a day the BSE’s benchmark Sensex rose 0.31% to end at 25,641.56 points.

The contract fits into Wipro’s long-standing “string of pearls” acquisition strategy of making modest investments in acquiring companies that can add to its own abilities or provide access to a market.

The deal is also another example of how top Indian IT firms have over the years bought captive IT units of large customer organizations and gained access to large outsourcing contracts in the process. In 2008, Wipro bought the IT arm of Citigroup Inc. in India for $127 million that gave it access to a $1 billion outsourcing contract from the company.

In the same year, TCS bought the India-based captive unit of Citigroup Global Services Ltd for $505 million that unlocked a 10-year outsourcing contract of about $2.5 billion.

The energy and natural resources business has easily been Wipro’s fastest growing business division over the past two-three years, at a time when the company has continued to lag larger rivals in the key banking and financial services sector that contributes nearly 30-40% of revenue for India’s $118-billion IT industry.

Wipro also said that the acquisition of ATCO I-Tek would help strengthen the company’s IT services delivery in North America and Australia, given its presence in both the geographies.

The ATCO deal could also lead to the possibility of Wipro mining more business from the Canadian firm.

“The deal is significant in size and provides visibility given the long tenure. We think that there is a probability that Wipro could win more business from ATCO over the next few years,” Credit Suisse said.