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Kelly Group, the South Afrian provider of “people management solutions” (not to be confused with the US staffing firm of the same name) announced that it has sold its its wholly owned US staff outsourcing business, MSquared Consulting, to US professional services firm Solomon Edwards. The USD 11 million cash deal follows five months of negotiations according to the Johannesburg based Financial Mail.
Gareth Tindall, Kelly Group CEO since July 2011, says there are a number of reasons for selling San Francisco-based MSquared, which has been a Kelly Group business since 1998. “MSquared is not a strategic investment,” says Tindall. “Managing a company in the US is also difficult, more so when it is on the west coast.”
It was also a case of selling MSquared while it is doing well, says Tindall. MSquared, which, he says, is prone to profit volatility, reported a 90% increase in operating profit to USD 2.6 million in Kelly Group’s year to September 2012.
For Kelly Group, MSquared’s sale will also bring a much-needed cash injection. “We had to reduce our debt level,” says Tindall. At its year-end, Kelly Group was burdened by debt of ZAR 174 million approximately USD 18.7 million), an amount equal to 108% of its shareholders’ funds. Interest paid in 2011/2012 totalled ZAR 21.8 million (approximately USD 2.3 million), well over double the company’s operating profit.
Not all the cash from the sale is earmarked to reduce debt. “We also want to bulk up in the SA market,” says Tindall. The time is ripe for this ahead of proposed sweeping change to labour legislation, which is set to accelerate consolidation in the staff outsourcing market. Tindall predicts a “big shake-up” in the market favouring large players such as Kelly Group.
Central to the shake-up is the proposal that companies will have to afford contract workers benefits equal to those of permanent employees in a similar position after a period of six months. “Companies will have to make key staff categories permanent and entirely outsource those that are not,” he says.