Acquisition of Intelenet

Serco agrees to acquire Intelenet, a leading provider of Business Process
Outsourcing services to the private sector

31 May 2011

Highlights

  * Serco has today signed an agreement to acquire Intelenet, a leading
    provider of business process outsourcing (BPO) services to the private
    sector around the world and in the domestic Indian market, for up to £385m.
   
  * From operations in 34 global delivery centres across seven countries,
    Intelenet provides a broad range of middle and back office services and has
    a strong customer base of international organisations, predominantly across
    the financial services, travel, healthcare and telecom sectors.
   
  * This acquisition is in line with Serco's strategy which is focused on
    driving organic growth, supplemented by strategic acquisitions of skills
    and capabilities to enter new markets and sectors where we see strong
    opportunities to enhance our growth and margins.
   
  * The acquisition will:
   
  * 
      + Provide access to attractive markets. The international and domestic
        Indian BPO markets are large, forecast to grow around 15% per annum in
        the medium term, and have margins reflective of high value services.
       
      + Broaden our customer and geographic reach. In line with our strategy of
        building a balanced portfolio, Intelenet's diverse and international
        private sector customer base will further increase our spread across
        markets.
       
      + Add to our scale and depth of capabilities. Together with our existing
        BPO-related operations we will have around 40,000 employees providing
        transactional, process and voice support, finance and accounting
        services, and business transformation consulting, making us strongly
        placed to provide our customers with a broad range of end-to-end
        business services.
       
  * The total acquisition cost of up to £385m includes contingent payments of
    up to £50m, and will be fully funded from Serco's debt facilities.
   
  * For the year to 31 March 2011, Intelenet's revenue was approximately £170m
    and Adjusted operating profit* was £19m.
   
  * Expectations are for Intelenet to continue achieving organic annual revenue
    growth of 10% to 15% and to maintain its Adjusted operating profit margin*,
    before net cost synergies, at around 12%.
   
  * The acquisition is expected to be accretive to earnings in the first full
    year with returns meeting Serco's cost of capital in the third full year of
    ownership.
   
  * The acquisition is subject to regulatory approval, which is expected in the
    coming months.
   
Chris Hyman, Chief Executive of Serco, said: "The acquisition of Intelenet
supports our ambitions as a leading global service company. The international
BPO market is growing quickly as companies seek out new ways to improve their
service and reduce costs. Intelenet's high value capabilities and customer
base, together with its economies of scale, means we can access new markets and
strengthen our existing propositions. I am particularly delighted that the
Intelenet management team will join us to continue driving the business
forward. Their passion for their customers and people, and their philosophy of
service excellence, means they will be a great asset to Serco."

Susir Kumar, Chief Executive of Intelenet Global Services, said, "We are
excited to become part of the Serco family which is strategically aligned to
our business. Becoming part of Serco will propel us to our next phase of
growth, by helping us to address a wider market and to provide more end-to-end
solutions. My management team and employees keenly look forward to working with
our new global colleagues. We are grateful for Blackstone, Barclays and HDFC
for their tremendous support of the company and we are pleased to be continuing
the strong relationship with them as our clients."

Akhil Gupta, Chairman and Managing Director of Blackstone Advisors India
Private Limited, added: "Intelenet becoming a part of Serco will accelerate the
adoption of its BPO services by customers around the world. A number of
Blackstone's global portfolio companies are amongst Intelenet's diverse
customer base. In addition, Blackstone's partnership with management, after
what was India's largest management buy-out in 2007, has helped Intelenet to
create thousands of jobs. We look forward to continuing our relationship with
Serco and management, and are pleased to support the next phase of Intelenet's
growth.

Background on Intelenet

Intelenet Global Services Private Ltd (Intelenet) is a leading provider of BPO
services. Headquartered in Mumbai, India, it operates 34 global delivery
centres across seven countries and has over 32,000 employees, 28,000 of which
are graduates.

Intelenet has a strong customer base of international companies in the UK, USA,
India and elsewhere around the world. Customers include Barclays, State Bank of
India, Travelport, Apria Healthcare, BSNL and Aircel.

Intelenet offers its global customers a broad range of middle and back office
services including transactional, process and voice support, finance and
accounting services, and business transformation consulting such as process
redesign and reengineering. The international BPO business primarily focuses on
three vertical markets: Banking, Financial Services & Insurance; Travel,
Hospitality & Transport; and Healthcare. As a customer-centric organisation,
Intelenet's services tend to be core to the operations of its customers and are
often complex and judgement-based.

Intelenet was founded in 2001 as a joint venture between TCS (Tata Consultancy
Services) and HDFC (The Housing Development Finance Corporation). In 2007 a
management buy-out was completed, resulting in the business being majority
owned by Blackstone Group, together with Barclays, HDFC and Intelenet's
management team. Today, according to NASSCOM, the trade body and chamber of
commerce of the IT-BPO industries in India, Intelenet ranks amongst the top BPO
exporters and the leading supplier in the domestic Indian market. Hewitt
Associates, a leading global HR consultancy, rank them as one of the best
employers in India.

Intelenet competes in its markets against other BPO providers such as Aegis,
EXL, Firstsource, Genpact, Infosys, Wipro and WNS, global diversified
consultancies such as Accenture and IBM, and more specialist providers such as
Convergys, Teleperformance and Xchanging.

Around three-quarters of their revenues are generated from international BPO,
with the remainder from the domestic Indian business. Intelenet has an order
book of around £500m over the next five years.

Intelenet's revenues for the year to 31 March 2011 were approximately £170m.
Revenues have grown organically over the last three years at a compound annual
growth rate of 12%. Intelenet's Adjusted operating profit* for the year to 31
March 2011 was approximately £19m. The Adjusted operating profit margin* has
averaged 12% over the last three years.

Strategic rationale

The acquisition of Intelenet will provide access to attractive markets. The
size of the addressable global BPO market is estimated at some $350bn to
$500bn, according to the Everest Research Institute. Around $200bn of this is
currently outsourced, with $40bn being provided internationally. This
international BPO market, where Intelenet is strongly placed, is forecast to
grow by around 15% per annum. International BPO in India represents around
$15bn or 32% of the market. The major source of market growth is anticipated to
be serving the US and the UK, with the Banking, Financial Services and
Insurance market continuing to represent the largest addressable market
opportunity.

The domestic Indian BPO market, where Intelenet is market leader, is forecast
to grow by around 20% per annum to $2.5bn in 2014, according to Gartner. India
has seen GDP increase by 7% per annum over the last decade, with rising incomes
driving demand from customers for services and consequently a growing use of
third parties to deliver them. In addition to this growth in the commercial BPO
market, there is also emerging demand for process outsourcing within the Indian
public services market.

The acquisition of Intelenet will broaden our customer and geographic reach.
The business provides services to a large number of private sector customers
across a range of sectors and countries. This acquisition furthers our strategy
of building a balanced contract portfolio, spread across sectors and
geographies. This enables us to select the best opportunities whichever market
they are in and to use expertise learned from one market and to take it to
another.

The acquisition of Intelenet will add to our scale and depth of capabilities.
Intelenet brings a wealth of expertise in a broad range of middle and back
office services, and its existing management team will continue to lead the
business and drive it forward, supported by a small number of Serco senior
leaders. Since 2009, Serco has been providing customer services, database
management and back office services in the Indian BPO market. The combination
of Intelenet with our existing BPO-related operations marks a significant step
change in our global capability and capacity to deliver value-adding services
across the world. Our combined BPO-related operations will have 40,000
employees providing services across seven countries. With these economies of
scale and capabilities, we will be strongly placed to provide existing and new
customers with a broad range of high quality end-to-end services.

Financial impacts

Under the share purchase agreement, the total acquisition cost, including the
assumption of existing debt, is up to £385m. This includes contingent cash
payments of up to £50m through to December 2013. These are dependent
principally on the delivery of additional revenue to Intelenet from Blackstone
portfolio companies and Barclays.

The acquisition cost, depending on the level of contingent payments, represents
a multiple of 17.6 to 20.3 times Adjusted operating profit* and 10.5 to 12.0
times EBITDA for the year to 31 March 2011.

The acquisition will be fully funded from Serco's debt facilities. The expected
funding cost of the acquisition will be around 5%. For the year to 31 December
2010, Serco's financial covenant leverage ratio based on consolidated total net
borrowings to EBITDA was 1.1 times. Taking into account on a pro forma basis
the initial cash consideration and earnings of Intelenet for the year to 31
March 2011, this ratio would have been 2.0 times.

It is anticipated that Intelenet will continue to achieve an organic revenue
growth rate of 10% to 15% a year, with the medium term likely to present
additional revenue synergies. The Adjusted operating margin*, before net cost
synergies, is expected to remain approximately 12%, in line with recent years.

Transaction costs charged in the first year will be approximately £3m. It is
anticipated that a similar amount of integration costs will also be incurred,
spread over the first and second year. Following the initial integration
programme, net cost synergies are expected to grow to approximately £5m per
year, driven principally by the integration of Intelenet with our existing
India-based BPO operations.

The acquisition is therefore expected to be accretive to earnings in the first
full year of ownership. The returns are expected to meet Serco's group cost of
capital in the third full year of ownership.

* Adjusted operating profit and margin is before the amortisation of
intangibles arising on acquisitions, and acquisition transaction costs.

Relevant figures in this release have been converted at an exchange rate of INR
72 to the pound.

Ends

For further information please contact Serco:

Analysts and investors - Stuart Ford, Head of Investor Relations T +44 (0) 208
334 4122

UK media - Dominic Cheetham, Director of Corporate Communications T +44 (0) 208
334 4334

India media - Marcus De Ville, Head of Media Relations T [phone]

Analyst and investor conference call

A conference call will be held at 0900 BST today to discuss the acquisition.
You can pre-register from 0700 BST at https://eventreg1.conferencing.com/
webportal3/reg.html?Acc=696488&Conf=178534 by filling in your details. You will
then receive an email with the access phone number and PIN so that you can join
the conference call automatically at 0900 BST. For those not able to
pre-register online, you are able to dial in and register from 0845 BST on + 44
(0) 207 162 0025 and quoting ID 896337.

Accompanying slides will be available at www.serco.com/investors from 0830 BST.
A replay will also be available online.

About Serco

Serco is a FTSE 100 international service company, which combines commercial
know-how with a deep public service ethos.

Around the world, we improve essential services by managing people, processes,
technology and assets more effectively. We advise policy makers, design
innovative solutions, integrate systems and - most of all - deliver to the
public.

Serco supports governments, agencies and companies who seek a trusted partner
with a solid track record of providing assured service excellence. Our people
offer operational, management and consulting expertise in the aviation, BPO,
defence, education, environmental services, facilities management, health, home
affairs, information and communications technology, knowledge services, local
government, science and nuclear, transport, welfare to work and the commercial
sectors.

More information can be found at www.serco.com

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