See improvement in margins post sale of subsidiary: NIIT

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Software trainer NIIT said on Saturday it has sold its US unit's entire stake in Element K Corp, a step-down subsidiary, to Ireland-based SkillSoft for USD 110 million.

Element K Corp provides management training services and builds content.

NIIT has also signed a long-term strategic and licensing agreement with SkillSoft to become a product and content developer for the Irish firm, the Indian firm said in a statement.

Speaking to CNBC-TV18, Vijay Thadani, chief executive officer of NIIT said the company's aim was to increase focus on management training services and other platforms of growth.

"In managed training services to be content agnostic and partner rather than compete with the content publishers is the basic strategic rationale behind the deal," he elaborated.

NIIT had bought Element K at an enterprise value of USD 35 million. "The subsidiary had contributed USD 86 million to revenue in FY11," Thadani said adding, "We see improvement in margins post sale."

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: What was the strategic reasoning behind selling Element K?

A: I think the increased focus on managed training services and other platforms of growth that we have been looking at is the basic strategic rationale. In managed training services, we intend to be content agnostic and partner rather then compete with the content publishers.

Q: After this deal, you will have a strategic agreement with the buyer of Element K that is SkillSoft. Can you take us through what kind of revenue potential that will open up for you?

A: The strategic partnership basically has three aspects. One is on services. We will have the ability to partner with SkillSoft for content development, platform development and training administration services which go along with the published content. Interestingly, before we had bought Element K, we used to be a partner of SkillSoft in these matters. So it will be a very quick transition there.

The second is joint research and development, and the third is that we would have access to the larger SkillSoft library, not just the Element K library. So those will be the three elements of partnership.

Q: Just want to understand the valuations of this sale of Element K a bit better as well. What was the purchase price when you first bought it and what kind of enterprise value have you sold it at?

A: We had bought it at an enterprise value of USD 35 million in August 2006 and this sale was at USD 110 million. Both were enterprise values USD 35 and 110 million.

Q: What does your revenue and profit profile look like because it contributed quite a bit to your top line, but I think it was a bit of a drag on the bottom line for you?

A: That's right. When we bought the company, it was making a loss, but we were able to turn it around. Then of course the economic recession hit and therefore we were struggling for a couple of years. Over the last two years, I think there has been a recovery.

Element K contributed USD 86 million to the top line last year, but the contribution to bottom line as you rightly said was very modest. So everything else remaining the same, there would be definitely an improvement in margin. The fact is that it generates free cash flows and that the balance sheet will get strengthened are the other benefits of this strategic move.

Q: So what is the exact cash inflow, net of taxes and any kind of transaction costs and would you use that to repay debt or for any kind of strategic reasons?

A: At this point of time, the exact cost of transaction and taxes is very difficult to estimate. But I think the capital gain/loss in US is fairly clear to everybody and normal transaction cost would be associated. We would be ready with these numbers by the end of the week once we have a clearer picture. We had debt sitting on our books, but as we open our accounts this morning, the cash being in account, we are cash positive on a net basis.

Our individual learning services and our new launch cloud campus have enormous growth potential, so we would like to make sure that we support these as well as the vocational training initiative which we announced I with the NSDC. The private schools initiative called N Guru and of course the managed training services which is the primary rationale of our focus in North America and Europe. These will be the four platforms of growth that we would be looking at.

Q: By when do you think you can fully make up for the lost revenues from managed training services through your association with Skillsoft?

A: So the managed training services business is growing fairly rapidly. As you know, in the last one year we coincidentally USD 110 million of new contracts and we are fairly well poised for a robust growth in that. So that will be one makeup.

The other businesses are growing at a faster pace than Element K, even though Element K had begun to grow. And the new initiatives will contribute to part of the growth. Lastly, now being a partner of Skillsoft, we would get the benefit of the outsourcing that they do and that will also make up for that.

So I guess the details have to be worked out, but I do feel that not in too distant a future, we would be able to make up for the top line. As far as the bottom line is concerned, I think that recovery will be much faster. In fact that recovery has already started to happen.

Q: Any further plans though in terms of stripping your non core exposures out of NIIT? I mean you hold 40% in NIIT Tech and there were reports that you may be looking for some kind of strategic partner?

A: We own 25%, in fact a shade lower than 25%, I think its 24%. At this point of time there are no plans.