Blackstone is betting that political shouting over American visas for foreign workers will come to nothing. The buyout group is offering up to $1.1 billion in cash for Mphasis, an Indian IT outsourcer. That looks brave at a time when most US presidential candidates are touting restrictions to a controversial visa programme that is critical to the industry’s success. The risk might explain why Blackstone has negotiated terms with seller Hewlett Packard Enterprise that offer it some downside protection.
The private equity firm will buy most of HPE’s 60.5 per cent stake in Mphasis, which earns the majority of its revenue from providing IT support to clients in the United States in sectors like banking and insurance. That potentially inserts Blackstone into the ongoing US controversy over visas for skilled workers, which outsourcing companies need so that employees can work onsite for American clients. Just late last year the US doubled fees for skilled worker visas, prompting India to make a formal complaint to the World Trade Organization. Presidential candidates ranging from Donald Trump to Bernie Sanders have vowed further restrictions.
A low valuation helps safeguard what is one of the biggest-ever private equity investments in India. Blackstone is offering between 2 and 9 per cent less than Mphasis’ last closing share price on April 1, valuing the Indian company at a multiple of between 11 and 12 times its net profit for the full year to March 2017, according to forecasts compiled by Eikon. That looks cheap when compared with peers. Smaller rival Geometric, which last week received an all-share takeover offer from HCL Technologies, is trading on around 14.5 times earnings. Industry giant Tata Consultancy trades on a multiple of around 18.
A long-term contract with the seller also buys Blackstone breathing space. Business that came through HPE added $300 million to the Indian company’s revenue in the year to March 2015, or 34 per cent of the total. The terms of the deal guarantees that Mphasis will receive $990 million in revenue from the US group over the next five years. That implies HPE-related revenues will decline by around 13 per cent each year – almost half the rate that analysts at Kotak had previously expected them to shrink. Meanwhile, being owned by Blackstone could open new doors: the US group has already identified 80 companies in its global portfolio that Mphasis could potentially serve.
India’s IT industry is a regular punch bag for politicians. Yet while the existing visa scheme is open to abuse, American companies complain of a chronic shortage of local IT talent. As long as market forces prevail, Blackstone’s Indian bet could be a winner.