US private equity firm KKR buys-out 85-per cent equity in Flextronics Software

18 April 2006

New Delhi: Flextronics International announced its decision to sell an 85-per cent stake in its software development and solutions business, including Flextronics Software Systems (FSS), and Frog Design, to a Kohlberg Kravis Roberts and Co (KKR) affiliate, making it the largest private equity buyout in the Indian IT industry.

The software business being divested includes Futuresoft, Emuzed, AUCT, DeccaNet, Azisa, and Avnisoft, and Frog Design, a strategic design consultancy firm in the US. These companies will be merged into a single entity with a new name.

Ash Bhardwaj, CEO, Flextronics' Software Development and Solutions Business and Arun Kumar, president, will continue to head the new company.

The US-based private equity giant KKR had shot into prominence in 1989 with its $31.3- billion leveraged buyout of RJR Nabisco, a company created out of the merger of US tobacco giant RJ Reynolds and the US food products major Nabisco Brands. At a cost of $31.4 billion including net debt of $6.3 billion, it was the then highest price ever paid for a commercial enterprise and is still the largest LBO in history.

The Flextronics deal involves over $600 million in cash and $250 million in face value note with a 10.5-per cent paid-in-kind interest coupon, maturing in eight years. The deal puts the enterprise valuation of Flextronics' software business at $900 million (Rs4068 crore).
Flextronics will retain 15 per cent equity in the business, which would operate as an independent software development and solutions company. Flextronics expects post-tax gain on the sale transaction to be at about $175 million.

"The transaction is the continuation of our previously announced strategy of focusing our efforts and resources on the re-acceleration of growth opportunities in core Electronics Manufacturing Services (EMS) business, which includes design, vertically integrated manufacturing services, components and logistics," Flextronics said.
According to the company, the monetising of non-core assets at substantial gains would generate cash proceeds in excess of $1 billion through the divestitures of its software, network services and semiconductor businesses.