Blackstone’s acquisition of HP’s (60.5 per cent) stake in Mphasis is a positive development for the latter. Blackstone has negotiated terms of Mphasis’ master service agreement with HP, which now has given a minimum revenue assurance.
Blackstone will be purchasing the stake in Mphasis at a slight discount to the market price and will make an open offer to the shareholders (26 per cent stake) at a price of ₹457.54 per share.
On Monday, the stock closed three per cent down in the bourses at ₹454.
According to a brokerage report, HP revenues in the quarter dropped for the 19{+t}{+h} consecutive quarter. Mphasis’ shareholders have long been asking it to get an assurance from HP for business volumes, but it has fructified only now with Blackstone’s debut as a major investor.
As per the new terms proposed for the master service agreement and agreed by Blackstone, HP has committed to a revenue totalling $990 million over the next five years.
Mphasis will also be included in the preferred provider programme of HP.
Also, given that Blackstone has a large portfolio of clients together make annual revenue of $85 billion and a close to $1 billion of IT spends, Mphasis may see a revenue boost.
However, do note that $990 million of revenue over five years is about $200 million a year. Given, Mphasis’ last twelve months revenue as of December 31, 2015 was $904 million, the contribution from HP even for 2016-17 may still be only 25-27 per cent (or a little lower if Mphasis crosses $1 billion in revenue).
What though is the good news is that the new agreement brings revenue visibility. HP and Blackstone have agreed on an 11-year contract — five years initially and then three automatic renewals of two years each. In December, HP had actually extended the agreement with Mphasis only for three years. But with Blackstone stepping in HP agreed to a multi-year contract, and it has also assured that there will be higher revenue contribution from its side every year.
In the December 2015 quarter, Mphasis reported that HP business revenue declined 11 per cent sequentially. Revenue from HP, which was 60 per cent for Mphasis five years ago, now made just 24 per cent of revenue in the December 2015 quarter.
The drop in contribution of the HP business to Mphasis in the last few years was driven by the stress in HP’s business highlighted Mphasis CFO in an interview with BusinessLine last year. So, unless HP weathers the global slowdown in IT spends and grows, Mphasis may not get a larger share of the pie.
Positives The positives for Mphasis currently are that its focus on the direct (non-HP) business and its new sales strategy has been paying up over the last one year.
In the December 2015 quarter, revenues from the direct business increased 32 per cent year-on-year, in rupee terms. Also, of the $61 million new deals in the quarter, over half of it was in digital solutions.
Despite the slowdown in legacy services, IT spends are growing strongly in digital solutions, and this may benefit the company.