Serco : Sale of offshore private sector BPO operations

Serco agrees sale of offshore private sector BPO operations for £250m

16 September 2015

Summary

· Serco agrees sale of its offshore private sector Business Process Outsourcing operations to private equity funds managed by Blackstone ('Blackstone') for approximately £250m

· Gross consideration comprises £220m cash and £30m loan note

· Transaction to complete around the end of 2015

· Overall exit of private sector BPO estimated to be broadly earnings neutral on a pro forma basis

· Reduction in pro forma leverage (debt to EBITDA for covenant purposes) to around 1 times

Rupert Soames, Group Chief Executive Officer, said: 'In March 2015 we set out our strategy to focus Serco on being a leading supplier of public services. A core part of that strategy was our decision to sell our private sector BPO operations. I am delighted that we have agreed this sale to Blackstone and secured this important part of our overall plan.

'This disposal will not only strengthen further our balance sheet but also enable us to focus on the Group's five core markets. Overall this gives us greater financial and operational flexibility to move forward, doing what we do best.'

Introduction

Serco Group plc ('Serco' or the 'Company'), the international service company, has agreed the sale of its offshore private sector Business Process Outsourcing ('BPO') operations (the 'Offshore BPO Operations'), the main elements of which are the former Intelenet business, to Blackstone (the 'Transaction'). The total enterprise value and gross consideration of the Transaction is approximately £250m. Serco anticipates receiving £220m cash consideration on completion of the Transaction and £30m in the form of a vendor loan note. The loan note accrues interest at a rate of 7% per annum and is to be repaid to Serco on the earlier of a subsequent change of control of the Offshore BPO Operations or six years from completion. The gross consideration received will be reduced by transaction costs, deferred consideration fair value adjustments and the value of certain indemnities for potential tax positions.

The operations being disposed of consist of middle and back office skills and capabilities across customer contact, transaction and financial processing, and related consulting and technology services. The operations employ 51,000 people in 67 BPO service delivery centres, of which 48,000 employees and 53 centres are in India. Customers are predominantly in the financial services, telecoms and travel sectors, with approximately 70% of the business being international offshore BPO and 30% being Indian domestic BPO operations.

The Transaction is expected to complete around the end of 2015, subject to customary closing conditions and regulatory approvals. Completion is anticipated to occur in three parts: one covering the majority of the Offshore BPO Operations, and two smaller but separate completions related to some operations in the Middle East. The proceeds from the Transaction will be used to reduce Serco's net debt.

Serco's profitability will be reduced by the earnings related to the operations being sold, however Serco is also in the process of exiting its remaining private sector BPO operations which are loss-making. Taken together, the overall exit from private sector BPO on a pro forma basis is estimated to be broadly earnings neutral and to reduce leverage (based on debt to EBITDA for covenant purposes) to around 1 times. These actions being taken therefore further strengthen Serco's balance sheet and are an important part of Serco's strategy to exit non-core markets and to focus on the provision of public services.

Revenue and profit effects of the Transaction

For the year ended 31 December 2015, the Offshore BPO Operations were expected to generate Revenue of approximately £235m and contribute EBITDA of approximately £35m and Trading Profit of £23m (before the impact of Contract and Balance Sheet Review adjustments and the treatment of 'assets held for sale' which excludes from the Company's consolidated accounts the depreciation and amortisation of such designated assets). These expectations included a benefit of approximately £5m from the utilisation of Onerous Contract Provisions ('OCPs'), therefore cash profitability would be lower by this amount. The expectations for 2015 were broadly similar to the underlying result for the prior year.

Serco has previously stated expectations for 2015 for the overall Group of around £3.5bn Revenue, £160m EBITDA (as defined for covenant purposes) and £90m Trading Profit (before Review adjustments and treatment of assets held for sale). If the Transaction completes before the end of 2015 then these expectations would be reduced to account for the residual period of 2015 that the disposed operations are no longer part of Serco.

At the previously reported balance sheet date of 30 June 2015, the carrying value of the Offshore BPO Operations expected to be disposed of was £241m (gross assets were £338m, liabilities were £97m). Changes in the composition of the operations which are now being sold, together with the impact of trading on the net assets since 30 June 2015, are expected to increase the value of the net assets being sold to approximately £245m. The gross consideration being received of £250m will be reduced by transaction costs and deferred consideration fair value adjustments together totalling approximately £15m, together with the granting of certain indemnities for potential tax positions which results in liabilities of approximately £35m remaining with the Group. On this basis, the exceptional loss on disposal would therefore be approximately £45m, though the outcome will be dependent on final adjustments up to the point of completion.

Exit of remaining private sector BPO operations

Serco is making good progress in managing the exit from loss-making contracts in the remainder of its private sector BPO business, which are predominantly UK onshore operations. For the year ended 31 December 2015, and including the effect of progress year-to-date in successfully transferring and ending early some of these contracts, the aggregate of these other operations not forming part of today's transaction are expected to generate revenues of approximately £90m. The aggregate negative contribution, together with remaining overheads, is expected to be an EBITDA loss of approximately £9m and a Trading Loss of £11 million (before Review adjustments and treatment of assets held for sale). These expectations include approximately £7m benefit from OCP utilisation against contract losses, with the remainder of the loss reflecting direct and allocated overheads.

Serco also continues to evaluate the potential for further disposals of remaining private sector BPO operations, together with further actions to transfer contracts, serve notice to terminate contracts early or otherwise run-off the contracts over the remaining contractual periods. The revenues and related contract losses from private sector BPO operations that remain part of Serco beyond the end of 2015 are therefore not expected to be material. However, the Group estimates there are approximately £7m of 'stranded' shared service centre costs that were previously absorbed by the Global Services division and that will now have to be recovered through additional cost savings over the course of 2016 and beyond.

Overall effect on earnings and leverage of exit from private sector BPO

Serco's overall exit from private sector BPO is estimated to be broadly earnings neutral. The effect of the Transaction proceeds reducing debt will lower the Group's net financing costs, which approximately offsets the reduction in total divisional profit (being the aggregate of the earnings from the Offshore BPO Operations being disposed of and the losses from the other operations being exited).

Prior to the actions to exit private sector BPO and as previously disclosed, Serco had anticipated EBITDA for 2015 of around £160m and year-end net debt of £320-350m, resulting in leverage of approximately 2x. Following the Transaction and other progress to exit private sector BPO operations and on a pro forma basis, it is expected that leverage would be reduced to around 1x.

Ends

For further information please contact Serco:

Stuart Ford, Head of Investor Relations T +44 (0) 1256 386 227

Marcus De Ville, Head of Media Relations T +44 (0) 1256 386 226

About Serco

Serco is a leading provider of public services. Our customers are governments or others operating in the public sector. We gain scale, expertise and diversification by operating internationally across five sectors and four geographies: Defence, Justice & Immigration, Transport, Health and Citizen Services, delivered in UK & Europe, North America, Asia Pacific and the Middle East.

More information can be found atwww.serco.com

About Blackstone

Blackstone is one of the world's leading investment firms. We seek to create positive economic impact and long-term value for our investors, the companies we invest in, and the communities in which we work. We do this by using extraordinary people and flexible capital to help companies solve problems. Our asset management businesses, with over $330 billion in assets under management, include investment vehicles focused on private equity, real estate, public debt and equity, non-investment grade credit, real assets, and secondary funds, all on a global basis. Blackstone has been investing in India since 2005 and has made investments of over $3 billion in private equity and real estate. Blackstone also provides various financial advisory services, including financial and strategic advisory, restructuring and reorganization advisory, and fund placement services. Further information is available at www.blackstone.com. Follow us on Twitter @Blackstone.

Forward looking statements

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