Dear All,
Forwarding you the Event Update on 3i Infotech.
3i Infotech Financial Software, Inc., a subsidiary of 3i Infotech Ltd., has signed an agreement to sell its US-based global billing and payments unit consisting of Regulus Group, J&B Software and JP Morgan BPO to an affiliate of Cerberus Capital Management, L.P. for US$137mn (~`614cr) in an all-cash deal. The transaction is expected to close within the next 60 days, subject to customary closing conditions and any regulatory approvals.
Not a big ‘Deal’
3i Infotech acquired Regulus Group in 2008 for a consideration of US$80mn with an additional payment of up to US$20mn based on an earn out linked to certain performance parameters. This deal was valued at 0.7x Regulus’s CY2007 sales (US$148mn). Though, 3i Infotech has not paid US$20mn linked to earn outs. J&B Software was acquired by 3i Infotech in 2007 for US$25.25mn; this deal was valued at 1x J&B’s CY2006 sales (US$25mn). The deal with JP Morgan was valued at 0.25x sales and 3i Infotech paid US$10mn as the cost for this deal. Thus, for all the three firms, 3i Infotech in total paid US$115mn.
3i Infotech also incurred restructuring costs of ~US$33mn for these acquired companies. However, these companies generated cash of US$45mn since their acquisitions. Thus, total effective cost for 3i Infotech incurred on these companies stands at ~US$103mn.
3i Infotech divested these companies for a consideration of US$137mn, of which US$7mn is the transaction fees, which the company has to bear. After this also, the company needs to pay debt of US$66mn, which was in the books of Regulus. So, effectively, valuation of this deal comes out at 0.6x cost of acquisition. The company intends to use the proceedings from this deal to reduce the debt position in its books and strengthen its balance sheet.
The firms, divested, are in the transaction processing business, majorly in the US, which is witnessing heavy ramp down since 1QFY2011 mainly due to a decline in volumes of cheques and bills issued. For the company, revenue from the transaction services business declined by 10.2% yoy to `822.3cr in FY2011 from `906cr in FY2010. Gross margin of this segment also declined by 170bp yoy to 30% in FY2011. We believe disinvestment was the only way out for the company, considering the deteriorating business environment for these entities; however, the company getting merely 0.6x of the acquisition cost reflects significantly depressing valuations.
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Fundamental Advisory Desk
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