Blackstone joins Baring in wait to exit profitable India IT investment

Blackstone, evidently, wants to make the most of the momentum at Mphasis, where growth rates in the core business have far surpassed those of peers. In other words, in contrast to the discount it got when it purchased the stake, it is looking to exit at a premium.

Blackstone Group LP had struck a neat deal when it bought a majority stake in Mphasis Ltd in 2016. The deal was at a 30-35% valuation discount to similar-sized companies such as Mindtree Ltd and Hexaware Ltd. Now, almost five years after it announced the deal, it is sitting on profits of nearly 300% on the investment. But as of now, it is just on paper.

As news reports suggest, a plan to exit the investment and book these profits hasn’t worked out. Blackstone, evidently, wants to make the most of the momentum at Mphasis, where growth rates in the core business have far surpassed those of peers. In other words, in contrast to the discount it got when it purchased the stake, it is looking to exit at a premium.

Needless to say, this limits the chances of a sale, and Blackstone has now backed out of the sale process, reports suggest. Of course, the private equity (PE) firm is no distress seller, and has time on its side. PE buyers typically have a runway of about seven years before looking to exit an investment, which gives it well over two years in supporting the business and looking for a suitable buyer.

Still, it’s important to note that Baring Private Equity Asia has also struggled to find a buyer for its majority stake in Hexaware Ltd. It’s already been more than seven years since it acquired the stake. Last year, the PE firm bought out minority shareholders and took the company private, with a view to attract strategic buyers.

“Baring’s long wait and now Blackstone’s inability to strike a deal shows there aren’t enough strategic buyers out there for Indian outsourcing firms with scale. Global firms such as Accenture and Capgemini either have captive units with immense scale, or have already gone ahead with acquisitions to gain scale. Unless Japanese or Indian tech firms step up to the task, PE firms looking to exit may continue to face challenges,” says an analyst at a domestic institutional brokerage.

What separates Mphasis from Hexaware is that while the latter’s owner is clearly looking for strategic buyers, news reports suggest the former had zeroed in other private equity firms as potential buyers. Strategic buyers prefer buying private companies and avoid the rigmarole of an open offer/delisting in India, say analysts. To improve its chances of a sale, Blackstone may either have to consider taking the firm private or lower its valuation expectations.

Source: Mint