Event Update: Wipro to acquire SAIC's global oil and gas IT services business

Dear All,

 

Forwarding you the Event Update on Wipro’s acquisition.

 

Wipro to acquire SAIC’s global oil and gas IT services business

 

Wipro will acquire US-based Science Applications International Corporation’s (SAIC) global oil and gas IT practice for an all-cash consideration of nearly US$150mn (~`675cr). Wipro, as on December 31, 2010, had cash balance of ~US$582mn in its books. The purchase is valued at approximately 0.8 times the revenue and six times the EBITDA on a trailing 12-month basis. The deal is expected to be completed by June-end. The funding is being done through internal resources.

 

The purchase covers only the IT business of the firm's oil and gas vertical, which provides consulting, system integration and outsourcing services to global oil majors. The acquisition (new CEO TK Kurien's first major M&A deal) is expected to help Wipro gain capabilities in various areas, such as digital oil fields petrotechnical data management and petroleum application services, addressing the upstream segment.

 

SAIC’s IT business is expected to contribute US$188mn to the top line annually, with operating margin of 13.5%. Hence, margins of the energy and utilities vertical are expected to come down initially but then increase going forward. The energy and utilities vertical, which currently contributes 10% to Wipro’s revenue, is expected to inch up to 11.1% after this acquisition. Consequent to the deal, nearly 1,450 employees are expected to transition to Wipro across North America, Europe, India and the Middle East.

 

SAIC also brings in a strong client base for Wipro. The top-10 clients account for 90% of SAIC’s revenue. Of the top 10, six are from Fortune 500 companies. Wipro predominantly has clients in the energy and utilities vertical from Europe and APAC region, while SAIC has a strong presence in the US. Hence, this gives Wipro access to new customers and cross leverage the potential it has got. Further, Wipro would gain domain capabilities in the upstream oil and gas vertical, which so far comprises just 5% of the revenue from the energy and utilities vertical and is expected to go up to 17.5% by this acquisition.

 

The natural gas sector has been growing at a compound annual rate of 10% and is expected to touch US$19bn by 2013. Oil and gas companies are investing in the upstream business, while looking at rationalising cost through IT. This acquisition will help Wipro to pull up its revenue, when peer company Cognizant is expected to take over the position of the third-largest Indian IT services company. The completion of the acquisition is subject to customary closing conditions and regulatory approvals and Wipro said it would be able to integrate this business in the first quarter of FY2012.

 

SAIC’s IT business will contribute merely ~2.3% to the company’s top line. We currently keep our estimates unchanged, owing to the ongoing transformation phase in the company. We maintain our Accumulate view on the stock with a target price of `507.

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