3i Infotech has decided to sell its US-based transaction services business to private equity firm Cerebrus Capital Management L.P for $137 million or about Rs 620 crore. The company will sell its US billings and payments unit, consisting of Regulus Group and J&B Software to an affiliate of Cerebrus.
What does the move mean for 3i?
The sale will reduce its dependence on the US market, on transaction services, and increase its exposure to IT Solutions (software services), in line with its priorities to focus more on this part of its business. “This divestment reduces the leverage and strengthens the balance sheet of 3i Infotech,” said V Srinivasan, managing director and global CEO of 3i, in a statement.
In 2010-11, the company’s revenues rose by 5% to Rs 2587 crore, to which IT solutions contributed 68% and transaction services 32%. However, transaction services saw a decline of 10% in revenues during the year and 28% during the March quarter. In comparison, IT solutions rose by 14% during the year and by 23% during the quarter. In terms of profits too, the IT solutions business has been doing better, and during the year its segment profit rose by 15% while transaction services saw a 15% drop in profit.
The billings and payments unit is a part of its transaction services business. 3i has not disclosed the combined revenues of Regulus and J&B in its statement on the sale. In 2009-10, Regulus Holdings earned revenues of about Rs 705 crore and net profit of Rs 31 crore. And, J&B earned revenues of Rs 120 crore and incurred a Rs 2 crore loss. Both units together contributed to about a third of 3i’s revenues and about 11% of profits.
The contribution to sales and profits in 2010-11 is likely to have declined, however, in line with the trend visible in the overall transaction services segment. 3i’s sales will decline as a result of this transaction, and while profits may decline a bit too, overall profitability will improve since transaction services has a lower profitability compared to the IT solutions business.
The proceeds from the sale can be used to lower 3i’s Rs 2,382 crore debt burden by about a fourth and consequently its interest costs as well. In 2010-11, interest ate away about a third of its profit before interest and tax.
Valuation
The company has sold a business with revenues of about Rs 705 crore in 2009-10 and an estimated Rs 641 crore sales in 2010-11. The relatively low valuation can probably be explained by the decline in sales and low profitability of the business.
3i appears to have got a reasonable deal, considering the state of the business and that Cerebrus will have to work hard to scale it up and become more profitable. Compared to its acquisition price, 3i has not reaped rich gains but has not lost its money either.
3i had acquired Regulus group in April 2008 for about $80 million, and would pay out up to $20 million more, depending on certain conditions. That pegs its total acquisition at $100 million, on the outside. Regulus was the largest independent remittance provider and a large document (bills) servicing company in the US, with 2007 revenues of $148 million. It processes check payments and bills.
In October 2007, it paid $25.3 million to acquire J&B Software Inc, which provided software services and products relating to remittance processing in the US. It had revenues of about $25mn. The acquisition was meant to improve 3i’s penetration in the US BFSI market. It was meant to provide 3i with significant cross-selling opportunities.
Read the press release from 3i on the BSE here.
There will be large reduction in Working capital requirement in addition to use of proceed for reducing the borrowing. Overall seems to be a very positive development for the company.
Thanks for your response. Yes, it appears positive. Wait and see how they use the money and what the sale will mean for its profitability.