Tech Mahindra acquires 51% in Comviva for Rs 260 crore, is in a rush to buy growth

The story in short:
Tech Mahindra is paying Rs 260 crore in multiple instalments to acquire a 51% stake in Comviva, a Bharti-group company that provides software solutions in the Value Added Services space. The acquisition adds about 7% to Tech Mahindra’s revenues (based on 2011-12 financials) and will add heft to its VAS business. This is a growing area, especially as mobile platforms are being sought after for their ubiquity among all economic classes of population, especially in emerging markets. Tech Mahindra is hungry for acquisition-led growth, and though it does not have the money to pay for all of them, its merger with Satyam Computer Services (Mahindra Satyam) should give it access to its cash reserves for these and more acquisitions.

Tech Mahindra is in a hurry to grow. The software company announced the acquisition of a 51% stake in Comviva, a Bharti group venture that markets mobility solutions. Tech Mahindra will pay Rs 260 crore to acquire the stake, of which Rs 125 crore will be paid upfront and the remaining Rs 135 crore will be paid over 5 years. The second instalment will be in the form of earn-outs that will depend on performance targets being met. The acquisition would have added about 7% to Tech Mahindra’s 2011-12 revenues.

Recently, Tech Mahindra had acquired Hutchison Global Services, a captive back-office telecom services company, for $87.1 million (about Rs 470 crore at current exchange rates). This acquisition will add about Rs 930 crore in annual revenues, and along with Comviva, will add about 24% to its consolidated revenues.

Tech Mahindra company had made headlines years ago by acquiring scam-hit Satyam Computer Services, an acquisition that has tested its mettle. One benefit of that experience will be its ability to successfully manage the integration process in acquisitions.

What is the logic for the Comviva acquisition?

  • Comviva had been put up for sale and news reports as old as March 2011 indicate that Bharti Enterprises was looking to dilute its stake in the company. This story, from the Wall Street Journal states that the promoters were looking to sell their stake, and indicated that the deal could value the company in the range of $300-$400 million.
  • Comviva is a provider of mobile software solutions that allow mobile operators to provide a range of value added services (VAS) to their subscribers. These could range from as simple services such as text messaging, ring tones, to more complex ones such as gaming, and even other services such as account management, managing airtime allocation based on demand, mobile financial services, and data mining of customer habits.
  • One advantage from this transaction will be that Comviva will become an independent VAS provider. The Bharti group will retain only a 20% stake in the company after this dilution. Bharti Airtel is from the same group, and though both companies would have had an arms-length relationship, large competitors would generally be more comfortable in dealing with an independently-owned vendor.
  • Comviva gets funds. The VAS space is a highly competitive one, which is evolving continuously, and therefore would require capital to develop new products and solutions. Working capital requirements too are likely to be high, as mobile operators typically pay these companies with a considerable lag. That the money will go to Comviva (at least a large part of it) and not directly to the promoters is evident from the fact that the 51% stake is on a fully diluted basis.
  • Tech Mahindra has a strong presence in the telecom vertical. In the mobile telecommunications space, it too has a presence in VAS, but in the enterprise mobility (mobile services provided to telecom companies and other companies), content services (there is some overlap likely in this segment), and embedded services (provided to equipment and handset makers). The Comviva acquisition should provide a major impetus to its VAS business, though Comviva’s sales or profit figures have not been disclosed.

Deal valuations

This story in Voice & Data reveals Comviva’s revenues at Rs 380 crore in 2011-12, growing by 22%, while this story at MediaNama states that its 2011 net profit was Rs 42.4 crore.

Thus, the Tech Mahindra deal values Comviva at Rs 520 crore, or about 1.4 times its 2011-12 sales. That is not cheap, considering that its listed competitor Onmobile trades at 0.9 times sales. Its fast-paced growth, profitability, and good growth prospects (especially as mobile money is set to become a major trend in emerging markets) may have influence this valuation. But Tech Mahindra has also bought insurance, by paying under half of the consideration upfront. If Comviva does not live up to its projections, the consideration will be automatically pared down.

That looks like a win-win deal. The only question mark is funding. Tech Mahindra is not a cash-rich company, and as of June 30, it had Rs 280 crore in cash and Rs 886 crore in borrowings. These two acquisitions should logically stretch its financials quite a bit. But it will also be merging Satyam Computer Services (popularly now known as Mahindra Satyam) with itself. That will give it access to Satyam’s cash and liquid investments of Rs 3,058 crore. That’s enough to cover its debt, fund these acquisitions, and leave enough money for a few more acquisitions, and to part-fund the company’s working capital requirements.

Read this story on about Bharti outsourcing its VAS to Comviva.


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