Mindtree and a sweet spot for Larsen & Toubro - CCD-founder VG Siddhartha under spotlight
Acquiring CCD-founder’s VG Siddhartha entire stake and further open offer, can mean Mindtree merger with L&T Infotech - a sweet spot for parent Larsen & Toubro.
An open offer has been made to Mindtree, which has created shock wave among the IT-service providers management. This offer has been made by infrastructure-giant Larsen & Toubro, after the company in a filing to exchanges revealed it entered an agreement with V G Siddhartha and his related entities namely, Coffee Day Trading Limited, Coffee Day Enterprises Limited, to acquire 20.32% stake in Mindtree. Under this deal, L&T will purchase Siddhartha's stake for Rs 980 per piece, which will result in Rs 3,269 crore transaction value. This would lead to Siddhartha's exit from Mindtree. However, L&T has made further offers to acquire more stake. This has been opposed by Mindtree management. However, even though Mindtree management have opposed this deal by calling it completely hostile, L&T is now standing at a very sweet spot even though there is risk involved related to the acquisition. Interestingly, analysts are indicating that L&T may even merge its tech-subsidiary L&T Infotech with Mindtree.
Both L&T and Mindtree shares, following the announcement, ended on a negative note on stock exchanges. L&T shares finished at Rs 1,356.75 per piece down by Rs 22.10 or 1.60%, while Mindtree shares ended at Rs 943 per piece below by Rs 19.50 or 2.03%.
L&T’s deal with Siddhartha involves acquisition of 3,33,60,229 equity shares of Mindtree aggregating to 20.32% of the paid-up equity share capital of Mindtree at a price of Rs 980 per share.
L&T has further placed a purchase offer to acquire 2,48,34,858 more equity shares at a price of not more than Rs 980. Furthermore, L&T also made an open offer to acquire 5,13,25,371 equity shares of Mindtree aggregating to 31% of the voting share capital.
Overall, the cost of acquisition for L&T is seen to be at Rs 10,733 crore, as per L&T filing.
Axis Capital and Citigroup Global Markets are appointed as Lead managers for the open offer of L&T.
Coming back to L&T, Ravi Menon and Ashish Agrawal analysts at Elara Capital said, “ We believe this will inevitably lead to a merger of LTI and Mindtree, as L&T is unlikely to retain two listed entities with complementary capabilities in the same industry.”
If LTI and Mindtree become a combined entity then, analysts believe, with annual revenue of USD 2.2bn it will be positioned between India’s large-cap firms with revenue in the range of USD 4-20bn and mid-cap firms with revenue in the range of USD 500mn-1.1bn and be fairly unique in terms of its size.
The duo said, “We do not expect significant cost synergies from the merger, but expect improved win rates for the combined firm and a broader pipeline as it will get featured in the default invite list for additional deals.”
However, honchos at Mindtree are not excited about the deal. In fact, the company’s promoter Krishnakumar Natarajan (executive chairman), Subroto Bagchi (co-founder), Rostow Ravanan (CEO) and Parthasarathy N.S. (executive vice chairman and COO), have even issued a statement indicating they are opposed to it.
In the statement, they said, “The attempted hostile takeover bid of Mindtree by Larsen & Toubro is a grave threat to the unique organization we have collectively built over 20 years.We remain 100 percent committed to our long-term vision of building an independent company. We believe it’s in the best interests of our shareholders, Mindtree Minds, and our organization overall to continue opposing this takeover attempt.”
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On the Mindtree promoter statement, analysts at Elara said, “We expect L&T to force a merger via shareswap with an attractive swap ratio. We expect a swap ratio that could imply 20-23x FY20E P/E to Mindtree (or an implied price of INR 1,050 to INR 1,200/share for Mindtree). We do not expect an all-cash deal as delisting will be difficult, given Mindtree management’s 13.3% shareholding will prevent L&T from reaching the 90% threshold to force delisting. A share-swap also will have added attraction of diluting the L&T stake in LTI and improving liquidity of LTI.”
Despite the obvious integration risks and possibility of some senior and middle management exits in the event of a hostile takeover of Mindtree by LTI, analysts at Elara say, “we think the combined entity will be in a sweet spot with scale in almost all major verticals, barring healthcare.”
On L&T, Elara Capital has reiterated Buy target with a TP of INR 2,160 for LTI on 21x FY20E P/E.
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