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Virtusa Completes Acquisition of Majority Interest in Polaris Consulting & Services, Ltd.

Virtusa Corporation (NASDAQ GS:VRTU) today announced that its India subsidiary, Virtusa Consulting Services Private Limited, has acquired all of the outstanding shares of Polaris Consulting & Services, Ltd. held by Mr. Arun Jain, founder and chairman of Polaris, Orbitech Private Limited, and certain other minority stockholders, representing an aggregate of approximately 51.7% of the fully diluted outstanding shares of Polaris for an average of $3.12 per share (INR 213.883 per share), for an aggregate purchase consideration of $165.89 million (INR 11,364 million).

Jitin Goyal will remain CEO of Polaris, and was appointed President, BFS, to lead Virtusa’s and Polaris’ business operations serving the banking and financial services verticals. Raj Rajgopal, President of Virtusa, was appointed President, ETS, and will lead Virtusa’s and Polaris’ operations serving the insurance, communications & technology, and media, information & other verticals. In their respective roles, Mr. Goyal and Mr. Rajgopal will be responsible for executing Virtusa’s and Polaris’ growth strategies, which will include driving over $100 million of cumulative revenue synergies over the next three fiscal years from the business combination.

Kris Canekeratne, Virtusa’s Chairman and CEO, stated:

“We are extremely pleased to close phase one of the Polaris transaction and we look forward to completing the mandatory open offer to Polaris’ public shareholders. Combined, Virtusa and Polaris create a robust platform and a unique and compelling value proposition. We are enthusiastic about providing end-to-end solutions and services in banking and financial services, greatly expanding our addressable market and positioning us well to pursue larger consulting and outsourcing opportunities.”

Mr. Canekeratne continued:

“I would also like to congratulate Jitin and Raj on their respective appointments. Their unparalleled industry expertise, leadership skills, and proven track record of driving business growth will be invaluable as we embark on our next phase of expansion.”

Beginning on March 11, 2016, Virtusa will commence an unconditional mandatory open offer to Polaris’ public shareholders to purchase up to an additional 26% of the outstanding shares of Polaris. The aggregate price for the shares to be purchased in such offer, assuming full tender and the offer price remaining unchanged, is estimated at approximately $86.1 million (INR 5,898 million). Upon closing of the mandatory offer period on March 28, 2016, and assuming full tender, and settlement of the tendered shares by April 12, 2016, Virtusa will own a 74.99% majority interest in Polaris.

Highlights of the Virtusa and Polaris Combination

The combination of Virtusa and Polaris creates a leading global provider of IT services and solutions to BFS, bringing together Virtusa’s deep domain expertise in consumer and retail banking with Polaris’ proven strength in corporate and investment banking;
Virtusa expects to realize over $100 million of cumulative revenue synergies over the next three fiscal years;
Polaris is expected to be approximately ($0.11) dilutive to Virtusa’s non-GAAP EPS in fiscal year 2016, slightly dilutive in fiscal year 2017, and accretive in fiscal year 2018 and beyond;
Upon the closing, Citigroup Technology Group, Inc. (“Citi”) has designated Virtusa and Polaris as preferred vendors for Global Technology Resource Strategy (“GTRS”) for the provision of IT services to Citi on an enterprise-wide basis;
Virtusa and Polaris combined have approximately 19,000 employees as of December 31, 2015.

Update on Financing of the Polaris Transaction

In support of the transaction, on February 25, 2016, Virtusa entered into a credit agreement with a syndicated bank group jointly lead by JPMC and Bank of America Merrill Lynch - which replaces Virtusa’s existing $25.0 million credit agreement and provides for a $100.0 million revolving credit facility and a $200.0 million delayed-draw term loan. Virtusa drew down in full the $200.0 million term loan to fund the transaction. Interest under these facilities accrues at a rate per annum of LIBOR plus 2.75%, subject to step-downs based on the Company’s ratio of debt to adjusted earnings before interest, taxes, depreciation, amortization, and stock compensation expense (“EBITDA”). The Company intends to enter into an interest rate swap agreement to minimize interest rate exposure. The Credit Agreement includes customary minimum cash, maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Credit Agreement is five years, ending February 25, 2021.

Guidance

Virtusa management has updated its current financial guidance to account for the closing date of acquiring 51.7% (1) of the fully diluted outstanding shares of Polaris, as well as the expected closing date of the mandatory open offer to Polaris’ public shareholders:

Fourth quarter fiscal 2016 revenue is expected to be in the range of $169.0 to $172.0 million. GAAP diluted EPS is expected to be in the range of ($0.02) to $0.00. Virtusa management currently expects Polaris to contribute revenue of approximately $17 million and to be approximately ($0.37) dilutive to Virtusa’s GAAP earnings per share, including approximately ($0.20) of dilution from transaction and integration expenses. Fourth quarter fiscal 2016 non-GAAP diluted EPS is expected to be in the range of $0.43 to $0.45, including ($0.11) dilution from the Polaris transaction.

Fiscal year 2016 revenue is expected to be in the range of $597.4 to $600.4 million. GAAP diluted EPS is expected to be in the range of $1.06 to $1.08. Virtusa management currently expects Polaris to contribute revenue of approximately $17 million and to be approximately ($0.40) dilutive to Virtusa’s GAAP earnings per share, including approximately ($0.23) of dilution from transaction and integration expenses. Non-GAAP diluted EPS is expected to be in the range of $1.95 to $1.97, including ($0.11) dilution from the Polaris transaction.

Virtusa’s current GAAP diluted EPS guidance for the fourth fiscal quarter and the full fiscal year ending March 31, 2016 estimates Polaris transaction and integration expenses of $8.8 million and $10.0 million, respectively. The Company’s fourth quarter and fiscal year 2016 diluted EPS both estimate an average share count of approximately 30.0 million, (assuming no further exercises of stock-based awards) and assume a stock price of $34.71, which was derived from the average closing price of the Company’s stock over the five trading days ended on February 29th, 2016. Deviations from this stock price may cause actual EPS to vary based on share dilution from Virtusa’s stock options and stock appreciation rights.

Advisors

J.P. Morgan acted as financial advisor to Virtusa. Goodwin Procter, LLP and ALMT Legal Bangalore acted as legal advisors to Virtusa. Credit Suisse acted as primary financial advisor and Spark Capital as co-advisor to Polaris. J Sagar Associates acted as legal advisor for Polaris and AZB & Partners acted as legal advisor for Orbitech.

 

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