Tech Mahindra (TechM) recently announced the acquisition of Hutchison Global Services (HGS), for $87.1 million (R480 crore at R55/$), payable upfront. HGS has $20-million cash on books (no debt) and the acquisition is effective immediately. The combined entity of TechM and Satyam had net cash of R2,430 crore at the end of June. TechM management expects the deal to be EPS accretive.

HGS works in the 3G technology space and provides end-to-end customer relationship management (CRM) solutions for the Three network in the UK and Ireland as well as Vodafone in Australia. The management suggested that the ebitda margins of HGS were in the mid-teens (TechM reported 21.4% ebitda in 1QFY13).

As part of the deal, clients of HGS have committed to procure services worth $845 million over a five-year period and agreed to HGS being their exclusive provider of certain services in India. According to the management, the deal has been structured to protect the margins of TechM. Growth in the telecom segment has been a challenge for most vendors over the last several quarters and in that context, this deal giving revenue certainty augers well.

TechM announced that it won another deal from Hutchison recently in the UK market. Though details were not provided, the management suggested that this deal will likely be in the transition phase over the next 3-4 months. Margins are likely to be depressed in the near term, in our view. The TechM and Satyam merger (ratio of 2:17) has been approved by shareholders of the two companies and the Competition Commission of India. High court approvals from Andhra Pradesh and Maharashtra are pending. Issues still pending include a) Aberdeen (UK) complaint; b) alleged advances of R1,230 crore from 37 companies; and c) tax demand from the Indian I-T department. The merger is likely to go through by end-2012/early-2013.

With revenues of ~$2.6 billion in FY13, the combined entity should be eligible for much larger deals and growth should pick up over the coming years. We have assumed Goodwill of R3,200 crore to continue on the books. Our target price of R895 is based on 9x March 2014E pro forma EPS for the combined entity. Jefferies