Corporate China
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Camelot raises buyout offer, de-listing looms

PUBLISHED : Monday, 23 September, 2013, 10:24am
UPDATED : Monday, 23 September, 2013, 10:25am

Software outsourcing firm Camelot Information Systems (NYSE: CIS) has quietly raised the value of its management-led buyout offer, as it nears its ultimate goal of going private due to lack of interest from Wall Street investors. Even with the increased offer, Camelot is still just worth just under $100 million (HK$775 million), a tiny fraction of what it was once worth when investors were much more bullish on the company and China's software outsourcing sector in general. The looming de-listing also comes just a week after Pactera (Nasdaq: PACT), one of China's only other major publicly traded IT outsourcing firms, said a group seeking to buy the company had lowered its bid due to weakening outlook. 

From an industry-specific perspective, these latest developments show that China's software outsourcing sector is sorely in need of consolidation, as most individual players remain too small to compete with global rivals like India's Infosys (Mumbai: INFY) and US giant Accenture (NYSE: ACN). From a bigger perspective, this latest move could indicate that the recent wave of buyouts of US-listed Chinese firms could be starting to wrap up, as many of the weaker players with cloudier prospects have now left the market.

I'm personally a bit surprised that investors weren't more excited about the raised bid for Camelot, as it hints at a behind-the-scenes bidding war for the company. A source had previously told me that China-listed Beyondsoft (Shenzhen: 002649), one of China's more successful players in the sector, had expressed an interest in buying Camelot, even though nothing was ever publicly confirmed. 

Camelot's American Depositary Shares (ADS) jumped 0.5 per cent to $1.91 (HK$14.8) after it announced the raised offer late last week. The company had previously received a management buyout offer in March at $1.85 (HK$14.3) per ADS, but has now announced it has entered into an official merger agreement at $2.05 (HK$15.9) per ADS, representing a 10 per cent increase over the previous offer.  

I suspect the offer was raised in response to interest from one or more rival bidders, perhaps including Beyondsoft, reflecting Camelot's low valuation. The company's ADSs once traded as high as $25 (HK$194), valuing Camelot at more than $1 billion (HK$7.75 billion) at its height. But interest in the sector has faded, as companies like Pactera and Camelot failed to achieve the strong growth that many had previously hoped for due to their small size and stiff competition from other global rivals.

Pactera itself is the result of a merger last year between two relatively big players, VanceInfo and HiSoft. But clearly this industry is in need of greater consolidation, which could finally start to occur once Camelot and Pactera are no longer publicly listed. Last week, Pactera announced that a group led by private equity firm Blackstone (NYSE: BX) had lowered its previous buyout offer for the company by seven per cent due to the company's weakening outlook. If that deal moves forward, I would expect to see Blackstone ultimately sell Pactera to another rival, either Chinese or foreign, within the next two years.

From a larger perspective, the Camelot and Pactera deals are part of a broader wave of privatizations of US-listed Chinese firms that have been announced over the last year. Most of those deals took place in weaker sectors like IT outsourcing, education and hotels, where growth potential is limited due in large part of a high degree of fragmentation. While we could still see a few more privatizations before the current wave subsides, I do think the biggest part of the wave has already passed, clearing many smaller and weaker companies from the market.

Bottom line: Camelot is likely to privatize at a new, raised buyout offer, as the recent wave of buyouts for US-listed Chinese firms starts to taper.

 

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