TCS will buy a 96.3% equity interest in Citigroup Global Services Limited, the India-based captive business processing outsourcing arm of Citi. Under TCSÆs ownership CGSL will continue to provide Citi and its affiliates with business process outsourcing (BPO) services for the contract term.
ôThis deal is probably the largest take-or-pay contract agreed in the information technology sector in India to date,ö says a source close to the deal. For TCS, the assured business from Citi makes this a very safe proposition. The deal also enhances the capabilities of TCS in the banking and financial services sector and positions it well to market outsourcing services to other global banks. Merrill Lynch advised TCS on the transaction.
CGSLÆs 12,472 employees provide services to Citi's consumer, corporate and global wealth management businesses worldwide. For the most recent year, CGSL derived 43% of its revenues from North America, 26% from Europe, the Middle East and Africa, 26% from India and 5% from the rest of the Asia-Pacific region.
Of TCSÆs current 116,000 employees, around 8,000 work within the outsourcing function. But sources say that CGSLÆs business will continue to be run separately, given the specialised nature of the services it delivers.
CGSL expects to generate revenues of approximately $278 million in 2008. TCS is paying 1.82 times this revenue for the firm, not taking into account the future assured revenues. But CGSL has registered a compound annual growth rate in revenues of 27% over the 2005-2008 period as Citi has outsourced more and more business to the Indian entity to benefit from cost and efficiency gains. On a prospective basis, assuming revenues grow by just 25% in 2009, TCS has paid only 1.45 times revenue.
CGSLÆs Ebitda margin is around 20%. Based on 2008 numbers, TCS has paid 9.1 times Ebitda, but assuming CGSL maintains an unchanged margin into 2009 (and the expected revenue growth does happen), the price to prospective earnings drops to 7.3 times.
The numbers suggest TCS has got a sweet deal even before taking into account the guaranteed revenues under the nine-year forward contract or the other businesses it may be able to win on the back of the expertise it has acquired.
ôThis is a landmark acquisition for TCS, helping us not only acquire new capabilities in the banking domain but also underscoring the importance of our long-term, sustainable relationships with our large customers, including Citi,ö says S. Ramadorai, CEO and manging director of TCS, in a written statement.
TCS is an IT services, business solutions and outsourcing firm, which is part of Indian conglomerate, the Tata Group. It has operations in 50 countries and generated revenues of $5.7 billion for the year ended March 31, 2008.
TCS, which earned more than $800 million of cash in the most recent fiscal year, will not raise any external financing for the takeover, say sources.
Citi and TCS have had a working relationship since 1992 and TCS is currently one of the largest IT services partners for Citi, working with the US bank across North America, Europe, India, Japan, Singapore and the rest of Asia-Pacific.
Since CitiÆs new CEO, Vikram Pandit, took charge in December 2007, one of his stated focus areas has been to sell ôlegacy assetsö, which the bank has defined as assets that are not core to its mission. The divestitures are to be used to shore up capital. On an earnings call earlier this year which is posted on www.seekingalpha.com, Citi said it has identified $500 billion of such assets, representing 22% of its total assets, including assets that are ôgood businesses (but) businesses that we think would be more valuable in somebody elseÆs hands because they just donÆt fit our strategic platformö. Citi raises only about half a billion dollars from the TCS deal but it certainly fits squarely into the defined category.
In India, Citi also owns 11.7% of the country's leading mortgage provider, HDFC, which has been valued at up to $2 billion. Citi has consistently maintained that its stake in HDFC is a strategic one and that it will not be exiting the investment.
Citi closed at $15.15 in New York on Tuesday, marginally down on the previous day, but up from the 52-week low of $12.85 it touched on September 18. TCS closed down 5% yesterday at Rs546.60 ($11.39).
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