Mumbai: Mahindra and Mahindra Ltd (M&M) will increase its stake in Tech Mahindra Ltd to 48.24% by buying a 5.49% stake from its partner, the UK’s BT Group Plc, which currently owns about 30% in the IT services firm.
M&M, India’s largest manufacturer of tractors and sport utility vehicles, will purchase the additional shares from BT between 2 December and 31 March 2011 at the prevailing market price, M&M informed stock exchanges on Thursday.
At Friday’s closing price of Rs 625 on the Bombay stock Exchange, the firm’s market value is Rs 7,860 crore and a 5.49% stake would cost Rs 432 crore.
Spokespersons of both Tech Mahindra as well as M&M declined to comment. Arun Seth, BT’s India country head, declined to comment when reached on his mobile phone.
Graphic: Ahmed Raza Khan/Mint
M&M has also waived the first right of refusal to buy BT’s remaining 24.5% stake, which allows the British company to sell it in the open market.
BT said it may consider further sales in future, but expects to have a shareholding in Tech Mahindra for “some time”, in a statement on its website.
Besides needing cash for paying dividends, BT is hard-pressed to bridge the deficit of about £7.6 billion (Rs 54,645 crore today) in its pension plan, Bloomberg reported on 27 October.
While BT is Tech Mahindra’s largest client, the Indian company counts other large telecom companies such as AT&T among its customers.
BT’s contribution to Tech Mahindra’s revenue has been declining, having dropped to 35% in the second quarter from 60% in the year-earlier period.
With its holding at a little over 24% once the transaction is over, BT will be reduced to a financial investor as against a strategic investor in the Pune-based IT services company.
As per the Indian Companies Act, 1956, a strategic investor owning 26% or more in a company gets the right to nominate its representative on the board. Currently, BT has two nominated directors— Richard Cameron and Nigel Stagg—on Tech Mahindra’s board.
“There is no statutory requirement for the board members to resign because the holding has fallen below 26%,” said Anoop Narayanan, partner at Mumbai-based corporate law firm Majmudar and Co. “It will depend on the shareholder agreement between the parties involved.”
Meanwhile, analysts say the move may be in preparation for the proposed merger between Tech Mahindra and Satyam Computer Services Ltd.
“Now that BT’s holding has come down, M&M doesn’t have to deal with a strategic investor while going about the merger of Tech Mahindra and Mahindra Satyam,” said an analyst with a domestic brokerage who tracks IT firms. He did not want to be identified as the company is yet to explain to analysts the rationale behind the latest move.
Tech Mahindra owns about 43% of Satyam and has already stated its plans to merge the two entities. While Tech Mahindra offers services only to clients in the telecom sector, Satyam is more diversified and has offerings across different industry sectors.
Tech Mahindra, incorporated as a joint venture between M&M and British Telecom Plc in 1986 was earlier known as Mahindra British Telecom. The firm changed its name to Tech Mahindra in 2006 when it went public.