Edelweiss - Event update: HOV Services acquires Lason (Analyst meet) - Maintain Sell

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Apr 19, 2007, 2:56:08 AM4/19/07
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HOV Services (HOVS IN, INR 233, Maintain SELL)

 

We attended the analyst meet of HOV Services yesterday. Key takeaways are:

 

HOV Services has funded the 'Lason' acquisition of USD 148 mn by:

  • USD 63 mn by issuing 10 mn Class A units (preference capital) at USD 6.32 per unit
  • USD 125 mn debt

 

The company has given the following guidance for the combined entity:

 

FY08

FY09

Revenues (INR mn)

8,600

11,195

EBITDA (INR mn)

861

1,466

EBITDA %

10%

13%

Net profit (INR mn)

344

670

Net profit %

4%

6%

Source: Company

 

  • We believe the guidance given by the company is stretched for the following reasons:

 

    • With sales of USD 157 mn in 2006, Lason has been growing at ~5% since the past 2 years at EBITDA and net margins of 10% and 5% respectively. Interest cost of ~INR 378 mn (USD 9 mn) will further depress net margins.
    • The company expects sales to grow by 30% in FY09 and margins to swell by 300 bps on the back of synergies arising out of the consolidation. With different service offerings and clientele, we do not see much synergies flowing from this acquisition.

 

  • Further, Lason was acquired by Charterhouse Group, Inc in 2004 at a cost of USD 30 mn (4.5x CY04 sales of USD 140 mn). With CY06 sales of USD 157 mn and similar margins as in 2004, HOV Services acquired Lason for USD 148 mn, i.e. ~1x CY06 sales. Hence we believe the acquisition is expensive.  

 

  • Probable equity dilution and higher debt would depress return ratios significantly over the next two years.

 

We maintain our SELL recommendation     

 

 

Regards,

 

Sanjeev Rohra

 

From: Sanjeev Rohra
Sent: Friday, March 02, 2007 5:18 PM
To: Markets
Subject: Event update: HOV Services acquires Lason Inc for $ 148 million (Downgrade to Sell)

 

HOV Services (HOVS IN, INR 265, Downgrade to SELL)

 

Event update: HOV Services acquires Lason Inc for $ 148 million

 

The company has funded the 'Lason' acquisition with:

  • Class A units (preference capital) of USD 63 mn
    • USD 16 mn – Promoters of HOV Services  
    • USD 14 mn – Merrill Lynch Mortgage Capital
    • USD 30 mn – Appollo Management
    • USD 3 mn – Promoters of Lason  
  • Debt of USD 125 mn – Merrill Lynch Mortgage Capital

 

Lason's business offerings include:

  • Offshore data entry
  • Claims & mortgage processing
  • Document scanning and ePublishing, etc.

 

We believe the acquisition is negative for the company because:

  • Lason has EBITDA margins of ~10% which is significantly lower than that of HOV Services (15%). Post consolidation the combined entity will have trailing annual revenues of ~USD 200 mn of which Lason's low-margin business would contribute USD 157 mn, i.e. 78% of total revenues, thereby dragging operating margins down by 300 - 400 bps.
  • Debt of USD 125 mn would increase the debt/equity ratio to 1.5 from 0.3 at present. Servicing the huge debt arising due to the acquisition will further depress net margins, which are currently at 10%.
  • ROE and ROCE of the company post consolidation would fall by 400 - 600 bps to ~16% and ~13% respectively.
  • Further, we do not foresee much synergy between Lason's low-end BPO business and HOV Services's existing business segments, viz. Accounts Receivable Management (ARM), Insurance & Tax Services (ITS), and Enterprise Management Tools & Services (EMTS).

 

Considering the above and a potential equity dilution, we downgrade the stock to a SELL

 

 

 

Regards,

 

Sanjeev Rohra

 

From: Prakash Kapadia
Sent: Monday, February 26, 2007 6:34 PM
To: Markets
Subject: HOV Services acquires Lason Inc for $ 148 million

 

News Subject:  

HOV Services acquires Lason Inc for $ 148 million

News Body:  

HOV Services Ltd has informed BSE that the Board of Directors of the Company at its meeting held on February 26, 2007, has unanimously approved a merger agreement that makes LASON a wholly owned subsidiary of the Company.

The two Companies combined will have trailing annual revenues in excess of $200 million. With the merger, the Company and its global workforce of more than 11,000 employees will serve more than 50% of the FORTUNE 100® Companies—including more than 4,000 active customers in the North American marketplace.

The LASON acquisition is consistent with the Company's strategy of acquiring leading global business process outsourcing Companies to deliver superior value to current and prospective clients through its globally positioned resources.

"We have already differentiated our abilities with our clients by achieving best in class results", said Sunil Rajadhyaksha, Executive Director of the Company.

"This acquisition allows us to leverage our expertise and accomplishments by combining the strengths of our organizations and deploying a global infrastructure to address the needs of new markets and the synergies within our expanded marketplace," said Rajadhyaksha.

The merger, according to Rajadhyaksha, will enhance marketing, servicing and delivery footprints to clients worldwide through integration, realignment and cross-selling.

The Company's client's will benefit from having delivery capability from over 49 locations located in the US, Canada, India, China, and Mexico delivering end-to-end integrated solutions including document-centric applications, Workflow Management, Finance and Accounting, Electronic Publishing and Knowledge Processing services.

Ronald D Risher, President and CEO of LASON, said, "We are very excited about this merger and look forward to our partnership with HOVS. Together, we will be able to deliver a more comprehensive and complete suite of outsourced solutions in our key markets that include Finance Administration, Financial Services, Healthcare and Publishing. In particular, the HOVS outsourced solutions in Accounts Receivables management will be of immediate interest to our established client base."

According to Rajadhyaksha the current LASON leadership and management team will remain in place and play a key role in the growth of the Company. The transaction is effective immediately.

"We are confident that our established competence in the industries we serve will be enhanced by LASON's management and delivery mechanisms. This merger allows us to leverage their combined expertise and ours to expand opportunity for our clients and investors," said Rajadhyaksha.

Under the merger agreement, the Company's wholly-owned subsidiary in the US ("LLC") will acquire 100% of the outstanding equity securities of LASON in a transaction valued at $148 million. The Company raised $188 million of new capital from leading global institutions— $63 million in equity and a debt facility of $125 million. Upon closing, the Company will have over $85 million in equity.

The acquisition is expected to be accretive to the Company's shareholders

 

 


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