Virtusa Corporation (NASDAQ GS: VRTU), a global business consulting and IT outsourcing company that combines innovation, technology leadership and industry solutions to transform the customer experience, today announced that it has entered into a definitive agreement to acquire a majority interest in Polaris Consulting & Services, Ltd. (“Polaris”) (BSE: POLARIS NSE: POLARIS MSEI: POLARIS), a global provider of IT solutions primarily to the banking and financial services industry segment, for approximately $270 million. The transaction consideration includes both the 51.7% majority interest and an unconditional mandatory open offer to purchase up to 26%⁽³⁾of the outstanding shares of Polaris from the public shareholders of Polaris (as further described below in “Terms and Financing of the Polaris Transaction”). In addition, upon closing of the Polaris transaction, Citigroup Technology Group, Inc. (“Citi”) has agreed to designate Virtusa and Polaris as a preferred vendor for Global Technology Resource Strategy (“GTRS”) for the provision of IT services to Citi on an enterprise-wide basis. 

As of September 30, 2015, Chennai, India-based Polaris had approximately 7,650⁽¹⁾ employees, serving its global client base through 12 development centers. For the six months ended September 30, 2015, Polaris generated total pro forma revenue⁽²⁾ of approximately $150 million. Polaris had cash, cash equivalents, and short-term and long-term investments of approximately $44.8 million⁽⁴⁾ as of September 30, 2015.  

Upon the closing of the Polaris transaction, the combination of Virtusa and Polaris would create a leading global provider of IT services and solutions to the banking and financial services industry segment. The acquisition would combine Virtusa’s deep domain expertise in consumer and retail banking with Polaris’ proven strength in corporate and investment banking. This combination would provide an end-to-end portfolio of differentiated solutions to the global banking and financial services industry segment, improving the combined entity’s competitive position, and expanding its addressable market. Virtusa expects to realize over $100 million of cumulative revenue synergies over the next three fiscal years from the business combination.

The Polaris transaction is expected to close during Virtusa’s fourth fiscal quarter ending March 31, 2016. The closing of the definitive agreement and the unconditional mandatory open offer to purchase shares from the public shareholders of Polaris are each subject to customary conditions, including receipt of required regulatory approvals.

Commenting on the transaction, Kris Canekeratne, Virtusa’s Chairman and CEO, stated, “Polaris brings a terrific team and an attractive, blue-chip client base to our organization. The combination of Virtusa and Polaris will enable us to provide end-to-end global BFS services and solutions, expand our addressable market, and position us to pursue larger consulting and outsourcing opportunities. We are enthusiastic about working with the Polaris team to build out our platform and offer clients a distinctive set of offerings.”

Jitin Goyal, Chief Executive Officer & Executive Director of Polaris, said, “Virtusa and Polaris share a common goal of delivering best-in-class solutions and the highest level of service excellence to our clients. I believe the combination of the two companies will enable us to better address our clients’ most critical business objectives.”

Terms and Financing of the Polaris Transaction

Virtusa, through its India subsidiary, Virtusa Consulting Services Private Limited (“Virtusa India”), has entered into a definitive agreement to acquire all of the outstanding shares of Polaris held by Mr. Arun Jain, founder and chairman of Polaris, Orbitech Private Limited, and certain other minority stockholders, representing an aggregate of approximately 51.7%^(5&6) of the fully diluted outstanding shares of Polaris for $3.38 per share (INR 220.73 per share) ⁽⁷⁾, for an aggregate purchase consideration under the definitive agreement of approximately $180 million (INR 11,728.08 million) ⁽⁷⁾. 

In addition, in accordance with the requirements of the Indian securities regulator, the Securities and Exchange Board of India ("SEBI") and the applicable Indian rules on Takeovers, Virtusa India shall make an unconditional mandatory open offer to Polaris’ public shareholders to purchase up to an additional 26%⁽³⁾ of the outstanding shares of Polaris. The aggregate price for the shares to be purchased in the unconditional, mandatory open offer, assuming full tender and the offer price remaining unchanged, is estimated at approximately $90 million (INR 5,877 million) ⁽⁷⁾.  

Virtusa intends to finance the transaction through a combination of cash on its balance sheet and debt. Virtusa has secured commitments for senior secured debt financing of $300 million from J.P. Morgan Chase Bank, N.A. and Bank of America, N.A., in support of the transaction, comprised of a $100 million revolving credit facility and a $200 million multi-draw term loan.  Interest under this facility accrues at a rate per annum of LIBOR plus 2.75%, subject to step-downs based on Virtusa’s ratio of debt to earnings before interest, taxes, depreciation, and amortization, adjusted for stock compensation expense (“adjusted EBITDA”). Virtusa intends to enter into an interest rate swap agreement to minimize interest rate exposure. The term of the facility is five years from date of close. The definitive credit agreement governing the facility will include a maximum debt to adjusted EBITDA ratio and a minimum fixed charge ratio. This facility will replace Virtusa’s existing $25 million credit facility with J.P. Morgan Chase Bank, N.A.

Financial Overview of the Polaris Transaction

In the fiscal third quarter ending December 31, 2015, Virtusa expects to incur approximately $0.6 million of transaction expenses related to the Polaris transaction.

For the fiscal fourth quarter ending March 31, 2016, assuming an early January 2016 close, Virtusa management currently expects Polaris to contribute revenue of approximately $70 million and to be approximately ($0.55) dilutive to Virtusa’s GAAP earnings per share, including approximately ($0.23) of dilution from acquisition-related charges. On a non-GAAP basis, Virtusa management expects the Polaris transaction to be approximately ($0.08) dilutive to earnings per share. Both the GAAP and non-GAAP EPS estimates include approximately ($0.07) of dilution from interest on debt to finance the transaction.

Virtusa management currently expects the Polaris combination to be slightly dilutive to non-GAAP earnings per share for fiscal year 2017, inclusive of expected revenue synergies including preferred vendor status at Citi offset by contractual productivity savings commitments for a period of two years at Citi, if not achieved, would require Virtusa to provide certain minimum discounts, and higher interest expense from deal-related financing. Virtusa management currently expects Polaris to be accretive to non-GAAP EPS in fiscal year 2018 and beyond, taking into account expected acceleration of revenue synergies, balance sheet deleveraging, tax benefits related to interest expense, and anticipated additional equity investments.

Advisors

J.P. Morgan acted as financial advisor to Virtusa. Goodwin Procter, LLP and ALMT Legal Bangalore acted as legal advisors to Virtusa. Credit Suisse acted as primary financial advisor and Spark Capital as co-advisor to Polaris. J Sagar Associates acted as legal advisor for Polaris and AZB & Partners acted as legal advisor for Orbitech. 

Financial Outlook

Virtusa management has updated its current financial guidance:

• Third quarter fiscal 2016 revenue is expected to be in the range of $150 to $153 million. GAAP diluted EPS is expected to be in the range of $0.39 to $0.41 and non-GAAP diluted EPS is expected to be in the range of $0.54 to $0.56.
• Fiscal year 2016 revenue is expected to be in the range of $654.6 to $661.6 million. GAAP diluted EPS is expected to be in the range of $1.02 to $1.08 and non-GAAP diluted EPS is expected to be in the range of $2.07 to $2.13.

Virtusa’s current GAAP diluted EPS guidance for the third fiscal quarter and the full fiscal year ending March 31, 2016 reflects the inclusion of Polaris transaction and integration expenses of $0.6 million and $10.0 million, respectively.

The Company’s third quarter and fiscal year 2016 diluted EPS both estimate an average share count of approximately 30.1 million,  (assuming no further exercises of stock-based awards) and assume a stock price of $56.99, which was derived from the average closing price of the Company’s stock over the five trading days ended on October 30, 2015.  Deviations from this stock price may cause actual EPS to vary based on share dilution from Virtusa’s stock options and stock appreciation rights. 

Conference Call and Webcast

Virtusa will host a conference call today, November 5, 2015 at 8:00 AM Eastern time to discuss the Polaris transaction, current financial guidance, and other corporate developments. To access this call, please dial 800-895-1085 (domestic) or 785-424-1055 (international). A replay of this conference call will be available through November 12, 2015 at 877-870-5176 (domestic) or 858-384-5517 (international).  The replay passcode is 117179.  A live webcast of this conference call will be available on the “Investors” page of the Company’s website (www.virtusa.com), and a replay will be archived on the website as well.