Hov services


(vaibhav) #21

Pls comment on the bolded part from http://www.moneycontrol.com/livefeed_pdf/Oct2014/HOV_Services_Ltd_011014.pdf-

"proposed sale transaction for purchase of entire investment for US$95 million by HOF4 will be contracted at the same valuation as provided to other major shareholder"

Does it mean that valuation (per share) for stake sale is same as valuation for the larger merger deal? In that case, the deal should be fair for the minority shareholders like us, right? Whats the debt that SourceHOV has, what part of the merger deal is being used to settle debt and for increasing the working capital?


(Varadharajan Ragunathan) #22

Vicky

No - your understanding is wrong. it simply means the same valuation that is offered to the majority shareholder in source HOV where HOV owns 26 %.

Being offered the same as other shareholders in which the promoter is the buyer and seller is the equivalent of DLF giving interest free loan to vadra to buy property back from DLF. Why would DLF pay market price ? Remember market price is determined by the promoter himself in this case as he is running the sale process. Infact, I think this is an elegant way for the promoter to low ball and get a majority stake in a crown jewel in which he had a minority stake earlier.

Remember that the merger is happening post this stake sale and that’s a transaction which is only FYI for minority shareholders. We have no idea what valuation that merger transaction is done at

My sense is that such a promoter might not give back the money to HOV shareholders. The $ 95 Mn is a left hand to right hand for the promoters and why would be allow minority shareholders to share the spoils in his hand ?

I smell something fishy here…

http://www.moneycontrol.com/livefeed_pdf/Oct2014/HOV_Services_Ltd_011014.pdf- Link: http://www.moneycontrol.com/livefeed_pdf/Oct2014/HOV_Services_Ltd_011014.pdf%C2%A0- ** at shareholder" **


(vaibhav) #23

Did you know that Banctec is also HandsOn-controlled ? -

So effectively SourceHOV is getting merged with HandsOn.Citi Venture Capital International (CVCI) has the remaining 74% stake in SourceHOV.

"The transaction value was not disclosed but based on the deal where HOVS is selling out, SourceHOV is valued at around $364 million.

In the transaction, stockholders of BancTec will receive stock in SourceHOV, and SourceHOV will use a new $1.1 billion credit facility to refinance existing indebtedness, redeem certain existing SourceHOV equity holders and provide additional working capital. It did not disclose which existing investors shares would be redeemed and if CVCI is exiting the venture."

In light of the above information, would you like to re-assess your opinion?

Pls comment on the bolded part from http://www.moneycontrol.com/livefeed_pdf/Oct2014/HOV_Services_Ltd_011014.pdf- Link: http://www.moneycontrol.com/livefeed_pdf/Oct2014/HOV_Services_Ltd_011014.pdf%C2%A0-

"proposed sale transaction for purchase of entire investment for US$95 million by HOF4 will be contracted at the same valuation as provided to other major shareholder"

Does it mean that valuation (per share) for stake sale is same as valuation for the larger merger deal? In that case, the deal should be fair for the minority shareholders like us, right? Whats the debt that SourceHOV has, what part of the merger deal is being used to settle debt and for increasing the working capital?


(vaibhav) #24

Varadha, I am also tilting towards your views that there might be something fishy here(am not sure however). consider following -

Hinduja Global is a BPO company with revenue 2612 Cr and operating profit 335 Cr and Market Cap of 1400 Cr :

http://www.screener.in/company/?q=532859&con=1

But yeah, Hinduja Global is trading at cheap valuations.

Genpact is similar company but trades at Mcap of 2 times the revenue but Genpact is fast-growing - the top-line grew by 50% in 2yrs (SourceHOV’s topline grew by <10% and do not know how much debt SourceHov carries)


(Varadharajan Ragunathan) #25

Prima facie seems to be a case of keeping minority shareholders in the dark.

1). banctec was acquired in april 2014 by hands on

2). they were running a sale process for source HOV

3). they take out the minority shareholders and then merge both the companies to create a company with a $ 1 bn turnover and $ 300 mn in EBITDA. At the going rates of multiples it should be a $ 2-$ 2.5 Bn mcap company.

4). their own company pays $ 95 mn for a 26% stake as a buyer in a sale processs run by them where ordinary shareholders have no visibility as to who the other buyers were and why a $ 1.2 bn price tag came down to $ 364 mn (at the $ 95 mn HOV is getting).

5). Since hands on is privately held and controls banktec anyway, it looks prima facie like a transfer of wealth from minority shareholders into owner’s hands

I have a feeling that HOV might not pay out too much of a dividend post this sale too.

Link: http://www.screener.in/company/?q=532859&con=1 <10% and do not know how much debt SourceHov carries)

http://www.vccircle.com/news/technology/2013/03/20/cvci-buying-out-apollo-global-bpo-firm-sourcehov Link: http://www.vccircle.com/news/technology/2013/03/20/cvci-buying-out-apollo-global-bpo-firm-sourcehov

Wow…is’nt this a breach of governance standards ? a news article a year back says it was exploring a price of $ 1.2 B. For a company that has $ 525 mn in revenues and $ 150 mn in EBITDA, $ 95 mn is 0.7 x EBITDA. And the merger with another company post the transaction which could be value accretive.


(vaibhav) #26

On your point#5, it looks like

)- they want to have full ownership (and no minority shareholders like me) through the PE fund

-they want to pay dividend to the minority shareholders for all their patience for holding the stock for a long time.

For valuations -

Compare with Genpact :

Revenue= Say $2.5 Billion (was $2.12billion in yr ending 2013), Mcap= $3.5Billion, Debt = $650 billion.

Genpact is actually trading -

)- at 1.4x revenue,

)- is a larger company (so, will get better valuation than HOV) plus US equity markets are at all time highs,

)- has better topline growth over the years,

)- has less debt.

Considering above (and Hinduja Global’s current Mcao), SourceHOV is not worth more than $500 million I guess (need your acceptance on this). SourceHOV’s long term debt could be more than $600 million easily -

https://www.moodys.com/research/Moody’s%20assigns%20B2%20CFR%20to%20SourceHOV;%20stable%20outlook--PR_270467


(Varadharajan Ragunathan) #27

I think $ 500 MM is very low - not even 8-9 x PE assuming a PAT of about $ 75 MM - half of the publicly stated EBITDA of $ 150 MM. I did M & A for a long time and 15-16 x PE is par for the course for an entity that big and profitable - remember one is getting full operational control

and control over the cash pile/cash generation as well.

My point that you ought to consider is that why would they dividend out any money to minority shareholders when they anyway have no great interest in pacifying public shareholders - most of their interests are now aligned in their private entities.

If they are immediately doing a merger with banktec which is also owned by them and refusing to disclose valuation to public shareholders, what kind of message does it to send ?

Also, look at the moody’s report, the company generates $ 40 MM in unlevered cash flow - at $ 365 Mn (based on teh valuation for 26% of $ 95 MM), they are getting the entity for a song - at 12% FCF yield. That’s terrribly terribly undervalued - imagine you getting infosys for 1/3rd of today’s share price. That’s the math here to give you a perspective.

Since you are a shareholder, can you write to the management asking why the valuation for related party merger with banctec is not disclosed ?

)-

)-

)-

)-

)-

https://www.moodys.com/research/Moody Link: https://www.moodys.com/research/Moody 's%20assigns%20B2%20CFR%20to%20SourceHOV;%20stable%20outlook–PR_270467

Prima facie seems to be a case of keeping minority shareholders in the dark.

5). Since hands on is privately held and controls banktec anyway, it looks prima facie like a transfer of wealth from minority shareholders into owner’s hands


(vaibhav) #28

when HOV’s IPO came in 2006, the subscription range was between 200/- and 240/- -

http://articles.economictimes.indiatimes.com/2006-08-31/news/27466558_1_hov-services-first-phase-capacity-expansion

This could be a factor to consider. If it were a fixed-deposit in a bank, Stock value would have become 200 + 8-9% CAGR for 8 year from 2006-2014, which comes to 350-400/-. Promoters will have this in mind while deciding the dividend. To pay that sort of dividend , they must unlock the capital by selling their stake (which is what they are doing.)

you have experience in M&A and I am just a B.E. who has started with stock markets abt 4 months back. so ofcourse you’d know much better :slight_smile: . My question is - wouldn’t the acquirer think in terms of EV rather than PE? If that is so, would not the companies with higher net debt to equity ratio get low PE valuations for acquisition? so the $95 million could be at max $125 or $150 million but not more than that?

Another point is that $95million is the minimum rate that HOV has decided for (if they get a buyer for >$95million, they will sell for higher).

I agree with that up till now, they are keeping minority shareholders in dark abt the deal. You give a good suggestion abt asking them. Thanks for your replies and thanks for future replies as well.


(Varadharajan Ragunathan) #29

Vicky

I’ve realized that rewarding minority shareholders is typically a 0 or 1 - a promoter who is fair and ethical and is transparent about his dealings will take his shareholders along - think infosys and a promoter who is not will not

A company that does not disclose, does not reward - $ 95 mn IMHO is low balling since the buyer and the seller are the same here. How do I know as a minority shareholder if the offer is fair.

What happens in a well managed company in such a case is that there is an independent consultant like a KPMG/Mckinsey who is handed over independent charge to run a sale process with independent director supervision (think of what happened in satyam sale) and they give a guarantee that the sale process is fairly run.

In this case, how do we know all the potential buyers were contacted and if yes, they agreed to buy or otherwise ?

And, a merger with another group company post a dummy sale ?

that said, I plan to initiate a small position today, if possible. I a curious to see how this turns out - I want to think of it as a tuition fee !

http://articles.economictimes.indiatimes.com/2006-08-31/news/27466558_1_hov-services-first-phase-capacity-expansion :))


(vaibhav) #30

Varadha,

Following are their contact details in case you or anyone wanna ask -

"Mr. Sriram Gopalan Iyengar

Chief Financial Officer

3rd Floor, Sharda Arcade,

Pune Satara Road, Bibwewadi,

Pune - 411037.

Tel: (+91 20) - 24231623

Fax: (+91 20) - 24221470

[email protected]"

I have sent following email and will update this thread if any reply comes (will call them in a day or two if a reply does not come) -

"Dear HOVS team,

I am an individual shareholder of HOV services. I have a couple of queries regarding the recent merger of SourceHOV and BancTec and regarding proposed HOVS’s stake sale for $95 million. I will be thankful if you couldanswerfollowing queries -

1). Since BancTec is alsoownedby Hands-on ventures, could you throw some light on themerger deal with SourceHOV? Is CVCI also selling its stake to BancTec? If yes, for what amount? How much is the net debt that SourceHOV has on its books?

2). When HOVS . In a bank fixed-deposit, 200/- 350-400/- in 8 years. Would HOVS be looking to hand out dividend in tune of 300-400/- per share to the minority shareholders after their stake sale in SourceHOV?

Request you to please address these queries.

Thanks and Regards

Vaibhav "


(Anil Konda) #31

Hi,

Today, the stock stopped trading at 10% circuit. What I know is that 20% is the upper circuit after which the trading in the stock will be suspended. I did not understand today’s behaviour. Some one please help me to understand how does the circuits get defined here. Thanks a lot in advance.

Regards,

Anil Konda.


(vaibhav) #32

NSE/BSE can change circuit limits (20%, 10%, 5% etc) to guard against volatility. They decreased UC to 10% from 20% for HOV services.


(Anil Konda) #33

Thank You for the clarification vicky. One more query - where can i see the circuit limits on the bse / nse site?

Thanks & Regards,

Anil Konda.

Hi,

Today, the stock stopped trading at 10% circuit. What I know is that 20% is the upper circuit after which the trading in the stock will be suspended. I did not understand today’s behaviour. Some one please help me to understand how does the circuits get defined here. Thanks a lot in advance.

Regards,

Anil Konda.


(vaibhav) #34

I have sent emails, reminders (to HOVs investor-relations' ID) and made 4 phone calls (to the CFO Mr. Iyengar). No replies , no help at all. Infact the operator says that he hasnt come to office yet , sometimes says he`s on vacation.

So I have sold the stock today.


(Varadharajan Ragunathan) #35

Vicky

That seals it for me - I am reasonably sure that something that is not accretive to minority shareholders is going on in this transaction.

I was a M & A banker and I know the amount of control sellers exercise over finding a buyer - in this case, the buyer is the same as the seller. So, technically you can pay any price - of course, since the auditor who is certifying the value is also paid by you, he will sing to your song too.

So, its a win win for everyone except for the minority shareholder - who does not even know how much he has lost, ironically.

For the record, if the management wanted to be fair, they should have had an independent committee/auditor certify on the fairness of running the transaction.


(vaibhav) #36

^ yes buddy.

And they may still pay good dividend but its not worth the risk imo too.


(vaibhav) #37

I got a call from CFO Mr. Iyengar but my queries were not resolved . few days back I threatened to complain in SEBI. I got a reply today , need your comments on below Varadha-

"Dear Sir,

__


I refer to your below mail and would like to mention as under____


a)The Majority Stakeholder In Source HOV is en cashing at US $ 247 Million for his stake . As far as the debt of SourceHov LLC , Long Term Debt is US $ 525 Million and other liabilities is US $ 107 Million.____

b)As far as dividend , would like to mention that the board will decide on dividend declaration at the appropriate time.____


Hope the above answers your queries."


(Varadharajan Ragunathan) #38

Vicky

Much as you would like it, I cannot see any grounds for you to go to SEBI. The company has not violated any law - it’s the spirit they have violated.

The below is the standard diplomatic reply - equivalent of DLF saying their transaction with vadra was held to the highest ethical standards.

My sense is they won’t pay too much dividend either - they will use this cash to enrich the promoters again through some round about means - say buy another company from the promoter at an outrageous valuation. That way, the promoters ate the cake and got the cake too.

If the process was run fairly, they should have appointed an independent agency to declare as much

under____


a)The

Million.____b)As

time. queries."


(vaibhav) #39

very well.

Also the point I was trying to convey was that I got additional info only on threatening to go to SEBI.

Btw when they say that Citi Venture Capital International (CVCI) is en cashing it share (~70%) for $247 million, do you think they could be hiding something or maybe lying?

Vicky

Much as you would like it, I cannot see any grounds for you to go to SEBI. The company has not violated any law - it’s the spirit they have violated.

The below is the standard diplomatic reply - equivalent of DLF saying their transaction with vadra was held to the highest ethical standards.

My sense is they won’t pay too much dividend either - they will use this cash to enrich the promoters again through some round about means - say buy another company from the promoter at an outrageous valuation. That way, the promoters ate the cake and got the cake too.

If the process was run fairly, they should have appointed an independent agency to declare as much

"Dear Sir,

under____


a)The

Million.____b)As

time. queries."


(nikhilbora) #40

How services has done really good in last couple of months. Can anyone give some insight on it whether it is a value pick at current levels?