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Firstsource acquires MedAssist


Firstsource has acquired MedAssist for $330 million. Few salient points:

  • MedAssist makes about $100 million in revenue
  • 22-24% EBIDTA margins, so EBIDTA is $24 million or so.
  • Growing at about 10% annually.
  • Firstsource will take a loan of $275 million and fund $55 million from its internal kitty ($80 million). Loan comes at LIBOR plus 2.5-3 percent.
  • EPS accretive from fiscal 2009, says Firstsource.

Firstsource’s share price has shot up from Rs. 71 to nearly 83 today, a stellar rise in a stable market.
My view: this deal is not very EPS positive on its own
Mathematical analysis: $275million at LIBOR + 2.75%, where LIBOR = 5.1% for a year’s term. That means 8.85% on the loan. That is $24.3 million in interest alone.

Consider then the loss of bank interest (6%) on the $55 million they put in. That’s about $3.3 million. Total outflow = $27.6 million. Total inflow = EBIDTA grown at 10% = $26.4 million.

Cash flow hit = (negative) $1.3 million or Rs. 5 crores. This is not considering depreciation and taxes, which are likely to worsen the impact.

On it’s own this deal will not be EPS positive; perhaps in 2009 there will be a marginal EPS credit, considering that the LIBOR stays where it is. In fact in 2010, three years from now, if things stay where they are today and revenues grow at 10%, this acquisition will yield an EBIDTA $3 million or so, about 12 crores. Post tax and depreciation this should be around 5 crores, in 2010. At the current equity of 42 cr. shares, the EPS impact is about 12 paise per share.

Firstsource made 97 crores in net profit last year, and by 2010 I don’t think the EPS addition will be even 5%. The 10% rise in share seems to overvalue the deal.

Yet, there may be synergies that I cannot see on their balance sheet:

  • A US medical presence from which to expand, with an available track record.
  • Better efficiency (but I doubt it because Firstsource’s current margins are about the same)
  • Entry into the med space with the HIPAA legislation may have been expensive had they tried to do it on their own.
  • Cross selling of other services to MedAssist’s customers.

I don’t know how much value to place on that (it’s like saying “what is the value of a mangalsutra”) so honestly I would say let’s wait and see. On the financial end, this deal provides limited upside, but as an investor I see acquisitions as the only way to go forward. With a Rs. 2 EPS, Firstsource is valued at 40 P/E – a tad higher than one would expect – comparatively WNS (in the US) is valued at 30 P/E, and WNS is much bigger. I would personally wait and watch before buying.

Disclosure: I used to own Firstsource shares bought after the IPO earlier this year (average price 73). Sold all shares around May end, 2007. No current positions.


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