TCS buys Citi BPO arm, gets $2.5-bn contract

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Tata Consultancy Services (TCS) on Wednesday said it will acquire Citigroup Inc’s interest in Citigroup Global Services Ltd (CGSL), the captive business processing outsourcing (BPO) arm of Citi in India, for $505 million in an all-ash deal.

Through CGSL, TCS will also provide process outsourcing services worth $2.5 billion to Citi and its affiliates over nine-and-a-half years. This is also the biggest contract signed by an Indian IT company, according to S Ramadorai, CEO & MD of TCS. The contract amount ($2.5bn) is spread out evenly over the period, and will result in revenues of $300 million per year for TCS from the next fiscal.

Sanjay Nayyar, CEO, South Asia, Citi, said the selloff was in line with Citi’s India-born CEO Vikram Pandit’s mantra, “to be fit and to focus on the core business.”

TCS, India’s largest IT company, said the agreement builds upon the existing relationship between Citi and TCS whereby TCS provides application development, infrastructure support, help desk and other process outsourcing services to Citi.

Analysts said that the deal was expensive for TCS since it has paid close to twice the revenues of CGSL for the buy. But, “as a long-term strategy, which will help TCS expand its BPO operations, this is a good deal,” said Harit Shah, an analyst with Angel Broking. Moreover, TCS gets an assured business from Citi, which in such troubled times bodes well for the IT major, he added. The deal will also place TCS as the second largest BPO services provider in India. The TCS stock was down 5.07% on the Bombay Stock Exchange to close at Rs 546.60 on Wednesday, after touching a 52-week low of Rs 510 in intra-day trading.

CGSL is one of the largest providers of BPO services within the banking and financial services sector (BFS), providing end-to-end process management across the BFS spectrum and a broad array of services to Citi’s consumer, corporate and global wealth management businesses worldwide. CGSL has 12,472 employees in India and it expects to generate revenues of close to $278 million in 2008. The company, growing at a CAGR of 27%, is well diversified and has capabilities across all banking businesses.

“This is an opportunity born out of the current situation,” explained Ramadorai, referring to the global financial turmoil that has sent many financial services giants into a tailspin. “The deal will help us in domain brand verticalisation,” he added.