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Kohlberg Kravis Roberts has acquired the Indian software unit of Flextronics International for $900m, becoming the first of the world’s big private equity firms to open its account in a market seen as a key territory for buy-out specialists.
The transaction is the largest in India’s technology sector and the most notable in a recent spurt of take-overs of mid-sized Indian IT companies by foreign buyers with deep pockets.
KKR’s second deal in Asia follows a strategic decision to step up its presence in the world’s fastest-growing markets.
The US private equity firm will gain 85 per cent of the Indian software services unit of Singapore-based Flextronics International, which will keep the other 15 per cent.
Flextronics International will receive $600m in cash and the balance through a $250m seller’s note that matures in eight years via a leveraged buy-out that is the biggest in India.
Flextronics Software, which was recently de-listed from Indian markets, employs 6,100 staff, mostly in India, and has been growing on par with the industry at 25-30 per cent. It expects to reveal sales of $200m for the year to March. Advisers described the valuation as “full” but said the strong outlook for India’s offshore IT sector merited the price.
KKR’s move is the third notable swoop on India’s mid-tier technology sector in the past month as global investors stake a position in India’s lower-cost offshore technology industry by targeting a band of medium -sized players.
This month, EDS of the US made a conditional offer for MphasiS, a software and business process outsourcing company in Mumbai, for $380m. In March, General Atlantic Partners, a private-equity investor, picked up a 15 per cent share in Hexaware, for about $67m. And Last year, Oracle bought out Citigroup’s 42 per cent stake in I-flex, India’s leading technology products company, for $593m.
“These are clear signals that the stand-alone growth of mid-sized IT companies is in doubt with existing owners. And to create the next generation of valuation they need buyers with capital to take them global,” said a banker who has advised on the recent spurt of transactions.
Flextronics International, which manufactures electronics products for handset makers, said the unit?s sale was part of the group?s wider sale of marginal assets, and will earn it a post -tax gain of $175m.
A person close to the transaction said the software unit’s high margins - the Indian IT sector enjoys margins of about 25 per cent - “sat uncomfortably in a group scrambling to achieve 2 per cent margins, and a divestment was inevitable”.
The sale marks KKR’s debut in India, pipping rivals such as Blackstone and Carlyle groups, which have announced large India-focused funds but have yet to seal notable deals.