Aviva extends BPO contract with EXL Svcs till Jan '12

WNS has struck a multi-year USD 1 billion BPO contract with Aviva. The deal involves WNS buying Aviva's Bangalore, Colombo, Pune and Chennai facilities. It also includes buying out Aviva's captive arm AGS for USD 228 million. WNS CEO, Neeraj Bhargava said this is a highly accretive deal for shareholders and will be very profitable from the first year itself.

Aviva has extended its outsourcing contract with EXL Services till January 2012.  EXL Services will provide services to Aviva out of its Noida facility. The original contract was till July 2009.

EXL Service's Pune Build, Operate and Tranfer (BOT) facility will be transferred to Aviva. Aviva will also transfer EXL Services' BOT facility to WNS.

Excerpts from CNBC-TV18's exclusive interview with Neraj Bhargava:

Q: Take us through the contours of this deal, it is a USD 1 billion multi-year contract, plus you get to acquire about five facilities?

A: First of all, we welcome over 5,200 employees as a part of this deal into the WNS family taking our employees strength to over 22,000. This is very important to establish our leadership position because winning a contract of this size really places us into another orbit altogether. Finally this is highly accretive deal for shareholders, very profitable from the first year itself and my team has really worked hard for years to get this done, so today is a great day for us.

Q: You said it is accretive from the first year onwards and it is a profitable deal for you, if you can take us through what that really means in terms of numbers, how much do you actually hope to accrue on account of this deal?

A: As a number, say it is a billion dollar deal over eight years, four months, which suggests that our annual revenue from this deal will be well over USD 100 million a year. Talking from the standpoint, it is very attractive and our profitability from this will be significantly above our profit rates from our current business today.

Q: In terms of valuations, there has been some amount of criticism or apprehension that you may have overpaid, how do you respond to that?

A: Valuation is a function of many things; it is a function of the quality of the asset, this is the premier insurance asset in the BPO area, the revenues are fairly significant. We are just about paying over two times revenues. It is profitable; I think another important aspect of this deal is that it is growing. Aviva Global Services, the company we bought just concluded a 580 FTE (full-time equivalent) contract with their Irish subsidiary. So if you add all the factors; this is big, it is profitable, it is growing and it helps us build skill, we have a lot of synergies given the fact that our operational footprint matches this asset. I think we believe that we have got a very good price for it.

Q: We have seen a lot of volatility in the financial markets now. What’s the sort of heap that you have seen on account of the US subprime crisis because Aviva is the largest insurance company in the UK?

A: Interestingly, the insurance part of the segment has been doing exceptionally well; we have seen lot of growth from our insurance business. You might recall that we also bought another insurance asset in the UK in April this year. So while the banks have got hit, insurance has not only been stable, we see a lot of growth coming from there which is what makes this asset, particularly that it's UK and Canada-based, extremely attractive.

Q: How are you funding this acquisition?

A: We are doing through a combination of our own cash as well as a credit line from one of the banks.

Q: Could you tell us which bank that is?

A: We are not disclosing that at this point.

Q: Do you expect a lot more of these captives to be picked up by companies like WNS? Is that going to be something that we are going to see in the coming quarters much more?

A: I think you will see more captive deals, but I don’t see a lot of them happening at the same time, because as our own experience of doing two of them - British Airways and this one - shows these deals take a lot of time and they involve getting a lot of different people within the clients to agree to do this. So from that standpoint, there is a lot to be set for the third party model being a lot more popular with people looking to offshore, but you will see one or two deals in a year, not more than that.

Q: Any plans of a merger with Firstsource?

A: No, we don’t have such plans right now; we are very excited and extremely tired and we are going to pause for a while before we think of any other deals.