Baring PE may buy stakes of founder promoters Rajendra Pawar and Vijay Thadani in NIIT Tech

Industry:    2019-02-04

Buyout fund Baring Private Equity Asia is said to be closing in on the stakes of founder promoters Rajendra Singh Pawar and Vijay Thadani in NIIT Technologies, which they founded in 2004, as consolidation in the midtier information technology space takes centre stage once again.

Baring, which already owns a controlling 63.22 per cent stake in Hexaware TechnologiesNSE 2.40 %, is bidding on a standalone basis and is negotiating with global banks such as Standard Chartered, Nomura, ING, Credit Suisse and Deutsche Bank for financing support of around $100-125 million for the transaction, said several people aware of the matter.

Since late last year, the sale process of NIIT Technologies, the listed technology services arm of NIIT Ltd, has gathered momentum.

The listed parent, a pioneer in computer coaching and IT training, owns 23.54 per cent of the total 30.61 per cent that is up for grabs. The transaction will trigger an open offer for an additional 26 per cent that the fund would seek to mop up to consolidate ownership beyond 51 per cent . A definitive term sheet is expected to be signed within the next fortnight.

NIIT

NIIT Technologies declined to comment, saying there was nothing to report. Baring PE Asia refused to comment on market rumours as per company policy. The stock has risen about 90 per cent in the past three years along with several other midcap IT stocks.

It shot up 70 per cent in the past year alone against 9.2 per cent appreciation in the benchmark Sensex. Therefore, most analysts do not see the PE fund paying a significant control premium over current levels. The six-month weighted average price of the IT solutions company on the BSE works out to Rs 1,198.72 per share, valuing the promoters’ stake at Rs 2,260 crore. “Going by the negotiations, a 10-12 per cent premium or Rs 2,500 crore for the promoter stake is likely, not more,” said an official involved. The market value of the company was Rs 8,118 crore at the Friday close.

Credit Suisse launched a formal sale process in the second half of 2018 that saw interest from PE buyout funds like Apax, Bain Capital and Blackstone, many of which wanted to explore a merger with existing portfolio companies such as MphasisNSE 0.52 % or Zensar, and strategic tech players like Virtusa. ET in its December 3 edition last year reported on the growing PE interest.

“Baring is looking at raising a third of the total deal size through acquisition financing. The final quantum would depend on the success of the open offer,” said a banker whose firm was approached.

Hong Kong-headquartered Baring was also said to be on the prowl for Mindtree as it explores ways to build on its Hexaware investment. For the moment, it has made a standalone bid though analysts feel a merger between NIIT and Hexaware to gain scale could also be on the cards.

“Tech companies have outperformed the general market because of the dollar strengthening even though, of late, several midcaps like KPIT have fell from the highs,” said a Delhi-based technology investor. “It’s not easy for the guys in the middle as scale does matter and you see TCS and Tech Mahindra pulling ahead.”
NIIT has been on a tear in the past few years, he said. “The promoters have not been decisive in the past but now there’s some serious money chasing them and they have other commitments to deal with now,” he said. “Deals in the sector have also turned out well for PE world. So the appetite is high.”

NIIT Technologies recently scaled up its digital business by hiring around 450 people. Since a leadership change in December 2017, the company has adopted a vertical-based business model. Banking and financial services contribute 16.2 per cent to the overall revenue of the group while insurance accounts for 28.8 per cent and travel and transportation 26.9 per cent .

Talking to reporters after third-quarter results in January, the company’s management said the order book has been growing for six consecutive quarters with at least two large deals every quarter. A January 4 report by JM Financial Institutional Securities Ltd expected NIIT Technologies’ margin expansion to be moderated by seasonally higher selling, general and administrative (SG&A) expenses.
“Given a healthy order book, dominated by the US region (58 per cent ), where total new orders grew 3.1 per cent QoQ in USD terms during Q3FY19, we estimate a USD revenue rise of 17 per cent YoY in FY19. The management expects an EBITDA margin at 18 per cent on annualized basis,” according to Amit Khurana of Dolat Capital. “In our view, margins will improve consistently, due to a high deal inflow, a lower SG&A, and a rise in AI-based automation orders.”
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