Kolkata: Business process outsourcing (BPO) company Firstsource Solutions Ltd has finally found a buyer.

The RP-Sanjiv Goenka group’s flagship electricity generation and distribution firm CESC Ltd announced Thursday it plans to acquire a controlling stake in the BPO for up to 640 crore in cash. The move will help Firstsource reduce its debt while giving the Goenka group an opportunity to diversify into the BPO or information technology enabled services (ITES) segment.

Firstsource said in a regulatory filing it will sell 226.89 million shares to Spen Liq Pvt. Ltd, a CESC Ltd subsidiary, for 274.5 crore or 12.10 a share, giving it a 34.5% stake. The deal values Firstsource at 795 crore on its expanded equity base. At its current stock price, the company has a market capitalization of 613 crore.

Three existing investors—ICICI Bank Ltd, Temasek Holdings and Fidelity Investments—have also signed a so-called share-purchase agreement with CESC to jointly sell 98.65 million shares for 120.35 crore, or 12.20 apiece. ICICI Bank is one of the founders of the firm.

The money infused into Firstsource will be used to repay the company’s debts, according to Sanjiv Goenka, chairman of the eponymous group. “At this time, Firstsource looks extremely undervalued and presents a very exciting growth opportunity," Goenka told Mint.

The cash for the acquisition will come from within the group, according to Goenka, even if not entirely from CESC’s balance sheet. He added the deal was closed in six weeks. “This is an important step in bolstering various stakeholders’ confidence in the company," said Rajesh Subramaniam, Firstsource’s managing director and chief executive officer, in a note.

CESC has announced an open offer for 26% more of the company’s increased share capital. It will pay 12.20 a share, or 242.15 crore in all, if the issue is fully subscribed. The open offer, though, is unlikely to get a good response, according to analysts, since it’s being priced at a discount to Thursday’s closing price.

The announcement was made after market hours but with the buzz around the deal earlier in the day, the share price of Firstsource ended at 14.24 on BSE on Thursday, up 7.63% from its previous close while the 30-share benchmark Sensex rose 0.26% to close at 18,758.63 points, and the IT index was 0.1% down at 5,691.82 points. CESC declined by 3.02% to 332.

Some analysts were skeptical about CESC’s investment in an unrelated business. “It is a surprising investment decision. Considering the uncertainties that Firstsource is currently facing, it may not be the right time to invest in the company," said an analyst at Elara Capital, asking not to be identified.

To begin with, Firstsource has huge debt on its plate. It had raised $275 million in November 2007 through foreign currency convertible bonds, or FCCBs, when the stock price was around 68. Bondholders can either convert their bonds to equity or redeem them on 4 December. Up to 30 September, the total amount of FCCBs repurchased and cancelled was $105.2 million and the nominal amount of bonds as on that date was $169.8 million.

In the April-June quarter, Firstsource Solutions reported a net profit of 14.12 crore, up 97% from a year ago while net sales for the quarter rose 14.1% from 205.40 crore. As on 31 March 2012, the company had a cash and bank balance of 556.33 crore.

CESC, which currently distributes power in Kolkata and its suburbs, earned 6,024 crore in consolidated revenue in fiscal 2012. Of this, 4,782 crore came from its power business, while the rest came from its subsidiary Spencer’s Retail Ltd, which posted an operating loss of 140 crore, according to the company’s latest analyst presentation.

Industry experts also note that BPO firms owned by Indian conglomerates—Aegis Ltd of the Essar group, HTMT Global Solutions Ltd of the Hinduja group and Aditya Birla Minacs—will have to revisit their strategies as they plan to achieve scale.

Pure-play BPOs are where IT companies were seven-eight years back in terms of scale and size, according to Sid Pai, partner and managing director of the India operations of Information Services Group (ISG).

According to Alok Shende, principal analyst and co-founder of Ascentius Consulting, the economic slowdown in the West has directly affected Indian BPOs because of the decreasing volume of transactions that has squelched the growth of this sector. These trends, he said, have brought down both the revenue growth as well as gross margins for the BPO industry and has been particularly tough for over-leveraged players (such as Firstsource), since the pool of profits was not adequate to meet the debt obligations.

Shende also pointed out that pure-play BPO players have found themselves out of the consideration set of large deals. He pointed out that the increased integration of IT and BPO deals has benefited the integrated IT players (all the top IT companies such as Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd and HCL Technologies Ltd have BPO arms to offer integrated services to clients) or pure-play BPO companies that acquired IT services companies to widen their solution offerings.

For instance, between April 2011 and July 2012, Genpact made five acquisitions. They included Triumph Engineering Corp. to strengthen its manufacturing vertical; Headstrong, a Virginia-based consulting and IT services company with a specialized focus in financial services, for $550 million, and Atyati Technologies, a technology platform provider for rural banks in India.

It’s important that these companies aim at becoming one-stop shops, said Pai, adding: “BPO players will have to add IT services to their portfolio if they want to grow."

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