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IGate, Apax set to buy Patni in 3-stage deal for around $1 bn

IGate, Apax set to buy Patni in 3-stage deal for around $1 bn
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First Published: Tue, Jan 04 2011. 11 44 PM IST
Updated: Tue, Jan 04 2011. 11 44 PM IST
Mumbai: The promoters of Patni Computer Systems Ltd, India’s seventh largest information technology (IT) firm by revenue, are set to sell their 45.88% stake in the company, as is private equity (PE) firm General Atlantic Llc its 17.5% in a structured deal to iGate Corp., backed by Apax Partners Llc, for around $1 billion (Rs4,500 crore), two investment bankers working on the deal, said.
Once the deal is done, the buyers will have to make an open offer to acquire at least another 20% of Patni Computer, in accordance with existing takeover norms that say any entity buying 15% or more in a company is required to make an open offer for at least 20% more. The stake sale will take place in three stages.
Also See | Ownership pie (Graphic)
In the first phase, Apax Partners will pick up a minority stake in iGate by subscribing to a preferential issue. In the second phase, which will happen simultaneously, the PE fund will lend up to $500 million to iGate to finance the buyout.
IGate will raise another $400 million through a mix of equity and debt. It has at least $100 million of cash on its books to complete the deal, one of the investment bankers said. Both bankers did not want to be identified.
In the third stage, Apax and iGate will pay around $1 billion to the three Patni brothers and General Atlantic.
On 29 November, iGate filed a notice with Nasdaq seeking to issue 10 million equity shares, along with its co-founders Ashok K. Trivedi and Sunil Wadhwani diluting part of their stake, to raise close to $392 million. The co-founders hold a little over 24 million shares, amounting to about a 47% stake in the company.
Patni Computer’s shares on Tuesday marginally fell to Rs468.30 apiece at the close of trading on the Bombay Stock Exchange. At $1 billion, iGate and Apax Partners are paying around 21% premium to the market price.
The promoters—Narendra Kumar Patni, Gajendra Kumar Patni and Ashok Kumar Patni —are expected to get a non-compete fee of Rs50 a share from the buyers. “Only the promoters will get the non-compete fee,” the first banker said.
The promoters have agreed to a three-year non-compete clause with the buyers, after which they can get into similar and competing businesses.
“Patni as a matter of company policy doesn’t comment on market speculation,” said a Patni spokesperson.
Both iGate and Apax Partners declined comments for this story.
According to the first banker, the promoters had earlier not agreed to a non-compete clause because Anirudh Patni, son of Narendra Kumar Patni, runs Patni Technologies Pvt. Ltd, which is in the same business as Patni Computer, for IT-enabled services.
Some issues relating to capital gains tax and future liabilities in the US are being sorted out between the seller and buyer, the second banker said. “This may take a few days,” he added.
Standard Chartered Bank Plc is advising Apax Partners while Jefferies and Co. Inc. is adviser to iGate for the Patni Computer deal. Ambit Capital Pvt. Ltd is advising the Patni promoters and General Atlantic is being advised by Credit Suisse. The consulting arm of McKinsey and Co. India did the due diligence of Patni Computer for iGate.
Founded in 1978 by Narendra Kumar Patni, Patni Computer has around 16,000 employees spread over 39 countries servicing 282 customers.
The company saw its profit for the third quarter ended 30 September decline to Rs128.09 crore against Rs171.57 crore in the corresponding period last year.
The net revenue of the company for the quarter was Rs796.67 crore.
With 8,278 employees, iGate’s earnings before tax for the third quarter ended 30 September was $16.121 million.
Patni Computer announced a dividend of Rs63 a share on 13 August. This cost the company Rs818 crore and the promoters, holding 45.88%, earned Rs380 crore.
“Patni’s promoters lacked vision. The company did not invest in human resources, research and development, expanding client accounts and in increasing the top line,” said Vijay Gautam, senior equity research analyst with Jaypee Capital Services Ltd.
“The promoters could have used the Rs2,000 crore cash (on books) to acquire small IT companies instead of announcing hefty dividends. That would have directly added to the top line growth of the company,” he added.
According to Viral Thakker, partner looking after IT-enabled services and outsourcing sector at audit and consulting firm KPMG, there is fierce battle between midsize IT companies as large firms win most big contracts.
“The big imperative for these midsize companies such as iGate is to scale up in a way that costs are under control and a large sales force is added to the existing one,” he said.
“Patni will satiate iGate’s need to grow,” Thakker added.
Graphic by Yogesh Kumar/Mint
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First Published: Tue, Jan 04 2011. 11 44 PM IST
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