Blackstone prepares India’s largest LBO loan for Mphasis acquisition
Private equity firm Blackstone is raising $1.1bn to support its purchase of a stake in Indian IT company Mphasis. The deal is set to be the largest leveraged buyout loan in the country — and comes with a group of 13 bookrunners at the top. Pan Yue reports.
The lead banks are jointly underwriting the five year loan. Standard Chartered and UBS have provided the largest commitments of $140m each.
Barclays, Citi, Deutsche Bank and Nomura are underwriting $100m apiece, while BNP Paribas, DBS, HSBC, Investec, MUFG Bank, Morgan Stanley and Sumitomo Mitsui Banking Corp are underwriting $60m each.
The loan will be used to support two funds managed by US investment firm Blackstone to acquire a stake of up to 75% in Mphasis. Abu Dhabi Investment Authority and UC Investments are co-investors alongside the private equity funds.
It is set to become the largest LBO transaction from India — beating Hexaware Technologies’ $600m deal from last year.
“It’s also interesting that Mphasis is raising a loan for the financing because many were expecting it to tap the bond market, as its previous financing was a bond,” said a banker close to the situation. “I think it’s because loans are more flexible, offer better terms and are much easier to raise.”
Mphasis issued a $500m five year bond in 2017. The proceeds were used to repay Blackstone’s initial investment in the company in 2016.
Blackstone bought a 60.5% stake in Mphasis from Hewlett Packard Enterprises in 2016, through a fund called Blackstone Capital Partners VI. The fund sold down some of its position in 2018, before adding it back last year to now hold 55.31% of Mphasis, through an entity called Marble II.
As part of the latest deal, Blackstone Capital Partners VII and BCP Asia will buy all of Marble II’s stake in Mphasis.
That has triggered a mandatory open offer for the purchase of up to 26% in additional shares from public shareholders. Blackstone has offered Rp1,677.16 per share to buy 49.3m more shares in Mphasis, for a total of Rp82.62bn ($1.1bn).
If the PE firm receives a stake of more than 75% in the Indian firm, it will reduce the number of shares it will acquire from Marble II, so its total stake will not exceed 75%. Mphasis will remain listed on the Indian stock exchanges.
The transfer of the shares comes as BCP VI is reaching the end of its life, said the banker.
Amit Dixit, co-head of Asia acquisition and head of India at Blackstone, said in an analyst call in April that the transaction is in line with the PE firm's initial view of Mphasis that it will be a 10 to 15 year growth story. He added that the two Blackstone funds, which are buying the stake, have a remaining life of around 10 years, according to minutes of the meeting published on Mphasis’ website.
Strong top-level support
This is Blackstone’s second attempt this year to move its stake in Mphasis.
When the PE firm was trying to sell Mphasis at the beginning of the year, Toronto-based Brookfield, the US’s Carlyle Group and Bain Capital, and UK investment firm Permira were all considering bidding for the assets. It also triggered discussions with banks for a financing of around $1bn.
However, that deal fell apart in March as the pricing offered by the only bidder in the final round, Carlyle, did not meet Blackstone’s price expectation. The pricing mismatch was also why the other three funds did not submit bids.
But that scrapped deal has led to an unexpected benefit for the Mphasis loan — by helping Blackstone put together a large MLAB group.
“Banks had already done their work when Blackstone was trying to sell Mphasis earlier, so all the banks know the credit, and the company has done a bond deal before,” said the banker. “Because of that, banks can get their approvals quickly.”
In addition, Mphasis’s sector of operation, IT services, which is believed to be Covid resilient, has added to bankers’ excitement about the deal.
“There’s a lot of interest in the sector, following a few successful syndications before. I think lenders now understand the business and operation,” said a second banker close to the situation.
Many are comparing Mphasis with Hexaware, also an IT services company. Hexaware’s $600m loan sealed last year was to support Baring Private Equity Asia’s take-private of the firm.
The close of that transaction, with the nine lead banks — ANZ, Barclays, BNP Paribas, Citi, Crédit Agricole, DBS, Deutsche Bank, HSBC and Standard Chartered — bringing in 10 participants, has offered bankers’ confidence in the new transaction.
Mphasis itself has seen strong financial performance. Its revenue for the financial year ending March 31, 2021 was Rp97.2bn, up from Rp88.4bn the year before. Its Ebitda grew to around $241m by end of March 2021, from around $131m four years earlier, according to its financial reports.
In addition, the fact that Blackstone is transferring the shares, rather than a new fund stepping in, shows lenders that Mphasis’s growth will continue, said bankers.
“It’s just transferring shares from one fund to another under Blackstone. The management is still the same, and the business strategies will not have big changes,” said the second banker.
The entry of two other long term investors has also helped justify the acquisition price, bankers said.
Marble II is expected to receive net proceeds of $1.7bn to $2bn from the sale, and will use the proceeds to repay a $500m outstanding bond, according to a press release from Fitch Ratings in May.
The buyout is still pending regulatory approvals.
Mphasis and Blackstone both declined to comment.