Larsen & Toubro Limited has mounted a ₹10,700-crore hostile takeover bid on mid-sized Bengaluru-based IT services company Mindtree.
The company announced to the exchanges that it had entered into a definitive share purchase agreement with V.G. Siddhartha and his related entities namely, Coffee Day Trading Limited and Coffee Day Enterprises Limited, to acquire 20.32% stake in Mindtree at a price of ₹980 per share, aggregating to approximately ₹3,269 crore.
L&T followed it up immediately with an order on its broker for purchasing up to 15% of Mindtree’s equity from the market at a price not exceeding ₹980 per share. Assuming it manages to put the deal through, that would cost it a further ₹2,414 crore. It has also announced an open offer as per SEBI Takeover Regulations, to the public shareholders of Mindtree to purchase up to an additional 31% of the outstanding shares of Mindtree at a price of ₹980 per share in cash. This would cost L&T a further ₹4,988 crore, taking the total outlay to ₹10,700-crore for a possible 66.32% stake in Mindtree.
In a press release, L&T said it had sufficient financial flexibility to fund the entire transaction through its existing financial resources.
This acquisition is in line with L&T’s stated strategy of focusing on services and asset-light businesses to drive profitable future growth, the release said. This further adds to L&T’s attractive IT services platform with a focus on new-age digital/cloud solutions, making it highly complementary to L&T’s current technology services portfolio.
While Mindtree would remain an independent listed entity, L&T would extend support to Mindtree in its business going forward, the release added.
Commenting on the development, S. N. Subrahmanyan, CEO and managing director, L&T, said: “This acquisition is part of our strategy to deliver industry leading IT services to our clients worldwide. It will help propel L&T’s technology portfolio into the top tier of Indian IT companies.
Mindtree has a well-established management team which has earned the respect of the market in terms of its service offerings and business practices. This acquisition will allow L&T to further enhance shareholder value for both its own shareholders and Mindtree shareholders in the medium to long term”.
The acquisition is subject to inter alia receipt of necessary regulatory approvals and satisfaction of other conditions as specified in the offer documents.
Meanwhile, the existing promoters of Mindtree are bracing themselves for a fight. The board of Mindtree will meet on Wednesday to consider a proposal to buy back fully paid-up equity shares of the company in a bid to thwart attempts of a hostile takeover by L&T.
The ‘tactical’ move by the Bengaluru-based company is expected to create a hurdle for L&T by propping up the share price.
“This is a brilliant tactical move,” G. Chokkalingam, founder and MD, Equinomics Research & Advisory, told The Hindu. “ They [L&T] will only be able to increase their stake only marginally through the buy-back, but that will not help them to get the controlling stake. However, offering significant premium to current market price through the buy-back can give them some edge,” he added. G Chokkalingam, Founder and MD, Equinomics Research & Advisory told The Hindu.
Mr. Chokkalingam noted that the stock prices moved up by at least 5% in the short-term when the buy-back offer is executed. “That is what happened in the case of Persistent Systems (whose buy-back is going on) and Cyient. Sometimes the stock improves even 10%.”
He said even if the Mindtree board decided to buy back 4-5% of equity capital at an attractive premium of about 20-25% over the current market price, then that would causeboostlead market prices to rise quite significantly. “So, therefore, in this background, where Mindtree is one of the costliest mid-size IT companies… buy-back will increase the stock price by at least 5%. This means valuation of Mindtree will be stretched further. So, on that price, if L&T has to make an open offer, they will have to offer a premium to make it successful,” he explained.
“So, it is a tactical move to create constraints for L&T to take over the company,” he said.
The buy-back offer has only heated up the battle for the ownership of Mindtree as this comes amid reports that L&T had readied a cash chest of about $1 billion.
Meanwhile, Subroto Bagchi, the co-founder of Mindtree announced on Twitter on Sunday that he had quit his job as the head of Odisha Skill Development Authority to return to Bengaluru to “protect the tree from people who have arrived with bulldozers and saw chains to cut it down so that in its place, they can build a shopping mall.”
Mr. Bagchi tweeted, “An imminent threat of hostile take over of Mindtree has made me to resign from the government to be able to go, save the company.”
On Monday, Mindtree shares rose 1.74% higher on the BSE at to close at ₹926.50 apieceper share, and those of L&T and L&T Infotech were down 1.32% at ₹1,378.85 apiece and 3.33% at ₹1,573.30 per share, respectively.
