Chinese state-owned IT-focused enterprise China Electronics Corporation (CEC) is the front-runner to acquire Chinese debt-laden conglomerate HNA Group’s IT outsourcing firm Pactera Technology International, said two sources familiar with the matter.
The deal is close to completion, the sources noted.
Beijing-based Pactera is wholly-owned by HNA Ecotech Panorama Cayman Co, a subsidiary of HNA.
HNA Ecotech declined to comment. CEC did not respond to phone calls seeking comment and its website does not provide an email address.
CEC has stakes in Hong Kong-based high-speed telecommunications components provider O-Net Technologies (Group) (21.32%) and China-based commercial business park developer China Electronics Optics Valley Union (33.67%), as per the company’s disclosure.
HNA Group has been widely reported since 1H19 to be running a sale process for Pactera. While there has been little news on the auction process over the past few months, on a post-results conference call held 15 November, HNA Ecotech’s management maintained that the sale process was still ongoing, said two credit investors.
HNA Ecotech’s management asserted during the call that although the IT outsourcing firm is no longer part of the conglomerate’s core business, HNA does not intend to sell Pactera at a huge discount, the two credit investors said. HNA aims to fully recoup its investment in the business, HNA Ecotech CFO Zhang Tao noted during the call, according to the credit investors.
HNA acquired Pactera from global private equity Blackstone in a USD 675m deal that closed early 2017, according to media reports.
Based on the USD 280m net debt reported by HNA Ecotech as of end-June and the management-guided FY19 EIBTDA of USD 66m, HNA would need to sell the IT outsourcing business at around USD 1bn, or 15x EBITDA, to recover its full investment, according to the two credit investors.
HNA first sounded out buyers for Pactera in 2018 after it decided to drop a listing plan for the target, Mergermarket reported in October last year.
The company marketed HNA’s stake at around USD 500m – USD 600m, as per a previous report by this news service in February this year. The deal was initially planned to close in June, as reported.
China UnionPay, Neusoft, Digital China Information Service, India-based Tech Mahindra, Advent International and Phoenix Tree Capital Partners were among the bidders in the previous auction, Mergermarket and local media reported in March.
HNA Ecotech said that its 2Q19 adjusted EBITDA fell 8.6% YoY to USD 14.3m, as revenue contracted 6.5% to USD 242.8m. It blamed the decline in part on its January sale of a 63.5% stake in a former wholly owned Shenzhen unit specialising in enterprise-resource-planning for third parties. The company expects to sell the remaining stake within one year, as per the financials.
Greater China continued to be HNA Ecotech’s main revenue contributor, accounting for 62% of the total, with the US in second, at 23%. The sale of the majority stake in the Shenzhen unit caused revenue from Greater China to shrink 6% YoY, to USD 150.7m, the report noted.
To facilitate the Pactera sale, HNA Ecotech has been paying down interest-free shareholder loans provided by HNA and its affiliates, including using a USD129m 364-day facility provided by Adare Finance DAC in June, as reported by Debtwire in August. The facility costs a 2% interest and 7% deferred fees. Adare Finance is an Irish vehicle of US hedge fund Davidson Kempner, according to a Bloomberg report on 25 November 2018.
As of end June, HNA Ecotech had USD 129.7m in cash and USD 3.1m pledged deposits against a debt of USD 453.8m, all of which is due within 12 months. The short-term debt includes USD 89.9m worth loans from related parties and USD 105.638m outstanding, 8% unsecured bonds due-2021, which are treated as current debt as they have been called, though the settlement date has been repeatedly delayed since late 2017. The settlement date is now 10 December.
Established in 1996, Pactera (formerly Dalian Haihui Sci-Tech Co.) provides digital-themed consulting, UX interaction, IT implementation and operations services to global customers. With 30,000 employees, it has over 30 branches across China, Japan, India, Malaysia, Singapore, Australia, the US, and Spain.