HOV Services @ Rs 153~up 62% in 4 days and worth more despite undervaluation of Investment Sale to Promoters

Disclaimer : My Clients and I do have an interest in HOV Services from 2013

HOV Services @ Rs 153~up 62% in 4 days and worth much more despite undervaluation of Investment Sale to Promoters

Earlier SS Recommendation in 2013 of HOV Services @ Rs 39  

We had recommended this Pune based Scrip to Clients  last year at Rs 39 precisely for the potential unlocking of  value of  the 26.1 % equity stake  it held in US based SourceHOV through it’s wholly owned US Subsidiary…most of the remaining Equity of SourceHOV is held by Citigroup  through Citi Venture Capital International (CVCI Private Equity) which bought out on March 19,2013 the full ownership interest of Apollo Global Management LLC Private Equity Group that the latter had acquired as a result of the restructuring of SourceCorp + some stake held by some minority shareholders

Unlocking of  Value of the 26.1% Stake in SourceHOV by selling Stake at undervalued US % 95 m to Promoters themselves ! 

This 26.1% Stake is proposed to be sold for US $ 95 m (@ Rs 580+ crs) to US  based HandsOn Fund 4 LLC (HOF4LLC) whose ultimate beneficiary owners are from the promoters of the Indian Listed HOV Services Ltd !  

HOV Services Prospectus filed with SEBI when it came out with the IPO in 2005/6 reveals that HandsOn at that time was 100% owned by Mr Parvinder Chadha and members of his family and managed by a team of seven of which four were promoters of HOV Services Ltd…Mr Chadha currently is the Executive Director of HOV Services Ltd 

While this deal sounds like a bonanza for HOV Services Shareholders as it amounts to Rs 464 per share (HOV Services Equity is Rs 12.5 crs of FV Rs 10) the Deal Valuation is clearly undervalued in my view

The Valuation should be over 160% more @ US $ 250 m and not just US $ 95 m !

The Valuation of this stake should be @ US $ 250 m  => over 160% than just the US $ 95 m that has been arrived at  !

If this 26.1% stake is valued at just US $ 95 Million it means that the whole of SourceHOV is valued at just US $ 364 m ! =.just 0.6 of Sales of US $ 600 m !….when it was reported to be seeking a twice Sales US $ 1.2 Billion Valuation last year like faster growth and bigger competitor Genpact had

SourceHOV is a leader in providing  Transactions Processing Solutions  and this merger will create a Global Leadership position with Revenues exceeding US $ 900 m

In the latest 15 months Annual Report of HOV Services Ltd as on March 31,2014,the Chairman and Promoter,Mr Sunil Rajadhyaksha said this in his Message

“Further, we are very optimistic about our investment made during 2011 via the merger of our indirect subsidiary HOV Services LLC with SOURCE CORP., whereby, HOVS owns 26.2 % of the combined entity called SourceHOV, a provider of end-to-end business process outsourcing solutions with highly customized services as well as specialized knowledge based processing and consulting solutions”

Morgan Stanley’s Role

SourceHOV had approved on December 29,2013 to appoint Morgan Stanley to advice and explore on strategic options…The Indian Listed HOV Services had confirmed this in a Exchange Notification on January 1,2014  despite an earlier notification  on October 28,2013 denying a leading financial newspaper story on the same that also stated a Valuation of US $ 1.2 b is being sought

Now they have notified the merger of BancTec with SourceHOV,both Dallas based….the ratio is for every 1 BanTec Share held the BancTec Shareholder will receive 1.0967 shares of SourceHOV thus marginally valuing BancTec higher than SourceHOV !

BancTec has revenues of just US $ 300 m and @ 4000 employees while SourceHOV has twice these revenues at US $ 600 m and over 12000 employees across 80 delivery centres in USA,Mexico,Canada,India,China & Phillipines

This is reproduce verbatim from the joint deal release statement overseas by SourceHOV and BancTec

“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……Morgan Stanley as Sole Bookrunner and Sole Lead Arranger has provided financing commitment in support of the transaction.”

Clearly it’s a deliberate Under Valuation Game being played out in a strong nexus

Corporate Governance Issues that Arise on this clear Undervaluation of SourceHOV

Many Questions arise that revolve around the Intent of  most ,if not all, of the Promoters of HOV Services and this gross Under Valuation of the stake at just US $ 95 m….clearly they will be benefited as buyers of the stake at the cost of the minority shareholders of the Indian listed HOV Services Ltd…..as the stake sale exceeds 20% of the Assets of HOV Services the company has to seek the permission of the shareholders,other than the promoters to approve this deal….Shareholders should vociferously demand a much higher price of @ US $ 250 m to sell the Investment stake as above

These are the promoter shareholders of HOV Services Ltd…they hold a 49.5% stake in the company….HOF2 LLC holds 13.34%….and remember the 26.1% stake in SourceHOV is being sold to HOF4 LLC !…and HOF is owned by the Promoters !

Sr

Shareholder

Total Shares : 12502522

No. of Shares held

% of  Total

1

Adesi 234 LLC

30,00,985

24.00

2

HOF2 LLC

16,67,933

13.34

3

Stern Capital Partners LLC

6,94,246

5.55

4

Sunil Vasant Rajadhyaksha

5,88,720

4.71

5

Sun Investment Partners LLC

91,773

0.73

6

Surinder Rametra

1,20,000

0.96

7

Rajadhyaksha Anil Vasant

25,422

0.20

Total

61,89,079

49.50

It appears that all of them will benefit handsomely at the cost of the minority shareholders of HOV Services Ltd by themselves buying out the Investment worth @ US $ 250 m at a much lower consideration of US $ 95 m
Also the US Based HandsOn holds shares directly in SourceHOV too
HOV Services from now Rs 153 to how much more higher !
Even at this Deal UnderValue of US $ 95 m the Book Value of  HOV Services Ltd should move up strikingly from current levels of  Rs 135 to cross Rs 400 after it receives the US $ 95 m and pays tax on this

The Book Networth is Rs 168 crs with the carrying value  after adding on fair value of and subtracting  share of loss in SourceHOV of this 26.1% stake at Rs 151 crs in the books as on March 31,2014

Even at the upper 20% circuit that HOV Services raced away yesterday too at Rs 153 levels the market cap is below Rs 200 crs….looks  a clear double from here too ! and much more if the deal value is considerably pushed up from US $ 95 m towards US $ 250 m….there is some hope for this even by the management as implied by the wording of the notification send to the exchanges where they have used the word ‘minimum’ in one place

So clearly they too are aware of this undervaluation…must be a slip in using this word as the Promoters must surely have drafted and/or approved this notification though it is signed by the CFO !

Hope SEBI and the Exchanges step in like they should to protect minority shareholders interests 

Hope SEBI, BSE ,NSE,ROC,Ministry of Corporate Affairs and Non Promoter Shareholders of HOV Services collectively can put pressure on the Promoters to extract a much higher and fairer Valuation for this deal so Minority Shareholders realise the true worth and Corporate Governance Issues are addressed satisfactorily

I don’t even want to see the mandatory Fairness Opinion from an Investment Banker and Valuation report from a CA Firm that the company has obtained and mentioned in the notification linked above to justify this deal value at just such a low US $ 95 m…It’s got to be biased

Mixed Emotions as I close this Post

As Sailors excitedly shout out “Land Ahoy!” when they sight Land should we too shout out “Land A-HOV ! ” ?

I’m truly happy and excited for my clients who hold HOV Services and should reap in the gains now

Just disappointed that the Promoters fell short on a fair Valuation and have shorted the minority shareholders of HOV Services…Oh ! there is no doubt that the minority shareholders stand to gain  handsomely but they stand to gain godly gains if the really fair and much higher valuation would have been arrived at

There is still hope on this though !…and my sense is that the deal Consideration will be raised from US $ 95 m  

Cheers !

8 thoughts on “HOV Services @ Rs 153~up 62% in 4 days and worth more despite undervaluation of Investment Sale to Promoters

  1. Sirji…

    Disclosure: I hold this from lower levels for the last 2-3 years…

    The enterprise value of $1.2 billion was speculated in media… But, the company also has a debt of around $580 million…

    So, as per your calculations the undervaluation is reduced to some extent…

    Generally, I think valuations of 1 – 1.5 times to sales is decent in BPO space…

    So, maybe this deal is a premium to the assumptions…

    🙂 😉 I am happy if I get more… 😛

    Cheers

  2. @Anand,I’m aware of the Debt and also 1 time Sale would be US $ 600 m valuation and not the US $ 364 m that is arrived at with this US $ 95m for this 26.1 % stake….yes,hope better sense of fairness prevails and the deal size moves up sizeably and all get more 🙂

  3. Hello,

    There are issue of corporate goverance, also major minority shareholder are connected to hof2, and there is citi angle to deal.

    Do visit my blogs for my artilce on Hovs.

    Also I would appriciate your critical feedback.

    Regards

  4. I doubt whether the offer will be revised – they have sold it for 1/3rd of market value that too to the company owned by the promoters. Without this investment, it is almost a shell company – i doubt whether they will give impressive dividend out of these proceeds – they have already mentioned that they will pay dividend and also invest in business. considering the way they have behaved, i think they will invest significant sum in business. therefore i feel that the current price is fair price.

  5. Dear Gaurav – My thoughts are same as yours . . . is there no corporate governance body which can intervene and question the promoters of this under valuation? Since the stake will be bought by HOF4 its clear that they want to make money and I firmly believe they will resell this investment for a much higher valuation (i.e. > 200m) at a later date – Appreciate your thoughts – Thanks Tony

    1. Hi Tony,this would not be the first or the last time that minority shareholders are deprived of a fair valuation any where in the world…India’s Stock Market Regulator ,SEBI is strengthening it’s teeth every day and the Revised & Amended Companies Act is pretty strong ….however a lot more needs to be actively and seemingly done to protect Minority Shareholders

      I’m sure HOV’s Investment Asset Sale Undervaluation Issue to it’s Own Promoters will be raised in the media and the concerned authorities will take cognizance and seek answers to the questions raised to remedy the situation

      The Company needs clearance from Non Promoter Shareholders on this sale as a special resolution…. on their part these shareholders should vote against the sale at US $ 95 m asking for the valuation to be closer to US $ 250 m….the postal ballot and e-voting has started and will be on till evening of November 3,2014

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