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Convergys to Acquire Stream Global Services, Becoming Number Two CMS BPO Vendor Globally

Convergys is to acquire Stream Global Services for $820m.  With anticipated combined CY 2013 revenues of ~$3bn (Stream ~$1bn, Convergys ~$2.045bn). Convergys will this year become the second largest CMS BPO pure-play by revenue globally, close to Teleperformance (expected CY 2013 revenues of $3.26bn).

The purchase price of $820m represents ~80% of Stream’s annual revenues but an impressive (NelsonHall estimated) 26.7 times projected 2013 EBIT. Stream has been improving its margins this year on the back of acquisitive-led revenue growth: Q1-Q3 2013 EBIT margin was 3.1% (up 167 bps y/y). Convergys has also been improving margins, achieving a significantly higher EBIT margin in Q1-Q3 2013 of 6.5% (up 748 bps y/y). However, the company expects ~$0.35 incremental non-GAAP EPS within the first year.

Convergys funded this acquisition through $400m of cash, and $420m of credit, of which $150m from existing credit facilities.

The main drivers behind this acquisition incllude:

  • Expanding Convergys’ geographic presence from being heavily weighted towards a U.S. client base (~85% of revenues). Stream has a large client base in EMEA and LATAM: when the acquisition is complete Convergys will derive ~20% of its revenue from these two regions, which currently account for just ~7%. Convergys expanded its geographic footprint in 2013 with the acquisition of Datacom’s contact center operation which expanded its presence in Malaysia and the Philippines. The Stream acquisition will involve the transfer of ~40,000 employees across 56 contact centers in 22 countries.
  • Building Convergys’ capabilities beyond customer care support. Stream has established technical support and revenue optimization capabilities (enhanced in 2013 through the acquisition of LBM)
  • Reducing Convergys dependence on three telco clients (currently account for ~47% of revenues; following the acquisition this client concentration will reduce to ~33%) an diversifying Convergys’ client portfolio in terms of vertical penetration. Currently telecoms accounts for ~62% of Convergys’ revenues with high-tech accounting for ~9%; the acquisition will increase high-tech to ~18% of revenue. And the high-tech sector presents possibilities for higher-margin CMS BPO services.

This is a key milestone in what has been a multi-year turnaround for Convergys. Since its divestment of its Information Management business in 2012; it has been aggressively taking out cost. This acquisition will help accelerate topline growth coming from a broader offerings portfolio with enhanced technical support and revenue optimization capability, and more global delivery capabilities that allow for multi-shore delivery, and improved language skills in LATAM and EMEA. This acquisition will result in a company with a well-rounded service line capability and an extensive global footprint with expected revenues approaching that of the current market leader Teleperformance.  

The purchase price of $820m represents ~80% of Stream’s annual revenues but an impressive (NelsonHall estimated) 26.7 times projected 2013 EBIT. Stream has been improving its margins this year on the back of acquisitive-led revenue growth: Q1-Q3 2013 EBIT margin was 3.1% (up 167 bps y/y). Convergys has also been improving margins, achieving a significantly higher EBIT margin in Q1-Q3 2013 of 6.5% (up 748 bps y/y). However, the company expects ~$0.35 incremental non-GAAP EPS within the first year.

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