• HP CEO Meg Whitman is looking to sharpen the company's focus
  • The stake sale could help funnel more capital into buybacks

Hewlett Packard Enterprise will sell its majority stake in IT services firm Mphasis Ltd. for about $825 million to Blackstone Group LP, as the U.S. private equity firm expands in India while the computer maker exits tangential businesses.

The investment firm will buy at least 84 percent of HPE’s stake for 430 rupees per share, the U.S. company said in a statement. The remaining 16 percent will be bought through a mandatory tender offer. If that offer is fully subscribed, Blackstone said it could end up paying as much as $1.1 billion for a maximum 75 percent stake in the Indian company.

Chief Executive Officer Meg Whitman is looking for ways to bring more focus to her company after a historic split in November, separating the unit that targets corporations with servers, storage and services from the business of printers and personal computers. The sale of the roughly 60 percent stake in Mphasis could provide cash to fuel buybacks, Rajesh Ghai, an analyst at Macquarie Group Ltd., said in a note last month.

Its target, Mphasis, is a mid-ranked player in India’s $150 billion software services industry that focuses its business on banks and other financial institutions, and gets about a quarter of its revenue from HP. Its shares closed 2.9 percent lower at 454.7 rupees in Mumbai on Monday.

“Blackstone comes with deep pockets. This deal will allow them to bloom and grow their own identity and chart a new growth plan,” said Arup Roy, a research director at Gartner. “It will be a struggle, however. They may not be able to compete with tier-one players. They will have to settle in the middle rungs of India’s IT services hierarchy.”

Offer May Rise

Mphasis posted sales of almost 58 billion rupees ($876 million) in the year ended March 2015. It was ranked eighth in an annual survey conducted by the domestic industry association in 2015, behind leaders Tata Consultancy Services Ltd. and Infosys Ltd. 

HPE said its decision to sell its Mphasis stake “aligns with its current capital allocation priorities.” The sale won’t have any impact on HPE’s commercial agreement with Mphasis, which is set to get renewed for another five years as part of the deal. HP will guarantee a minimum of $200 million in annual business for Mphasis over that period, said Amit Dixit, Senior Managing Director for Blackstone in India.

Blackstone has invested $2 billion in India across private equity and real estate since 2015, including a $384 million acquisition of Serco Group Plc’s processing business. It’s buying 84 percent of HPE’s stake via a private placement, in what it said was its largest-ever Indian investment. Under Indian takeover regulations, the firm must also make an open offer for another 26 percent of Mphasis’ voting stock, through which HP plans to unload its remaining shares, it said in a statement.

HP Key to Mphasis

If other shareholders were to subscribe to the entire 26 percent stake Blackstone is offering to buy, the investment firm could wind up paying as much as 70.71 billion rupees for Mphasis shares in total, the investor said.

HP has been a key customer for Mphasis, providing 24 percent of sales in the quarter ended Dec. 31. While significant, that’s down from 35 percent in the year-ago period.

The transaction, which is expected to close in the second half of fiscal 2016, won’t impact HPE’s targets for an operating margin of 6 percent to 7 percent for the year, the company said. In 2015, HPE recognized $75 million in pretax profit from its stake in Mphasis.

(A previous version of this story corrected the margin targets in the final paragraph.)

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