The change in ownership of Patni Computer Systems Ltd, on the cards for many months now, is finally happening. iGate Corp. has agreed to buy 63% in the company from its erstwhile promoters—the Patni family—and private equity (PE) firm General Atlantic Llc. The deal price of Rs503.50 per share didn’t come as a huge surprise, as is also evident from the fact that Patni’s shares rose by less than 1% after the deal price was announced.
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Even so, iGate’s open offer for an additional 20.6% stake in the company is likely to receive a good response from minority shareholders. First, the offer price represents an 8.5% premium over Patni’s current traded price. Besides, Patni shares could correct after the open offer closes owing to near-term concerns such as an increase in attrition. If all minority shareholders tender their shares in the offer, the acceptance ratio would be around 55%.
What about the long-term prospects for Patni shareholders? Going by iGate’s delisting itself from the Indian bourses, it’s quite likely that iGate will look at delisting Patni, too. Assuming its open offer is successful, it would have a high 83.6% stake in Patni. At current valuations, it would need to shell out another $240 million (Rs1,090 crore) to completely own the company. Of course, this would involve the reverse book-building process, which may entail a high cost.
Another alternative, and a cheaper way to do this, would be to merge the two companies and offer Patni shareholders a stake in iGate. Thanks to the Standard Chartered precedent, it may be possible to issue international depository receipts of the US-listed iGate. This option, however, may not be particularly lucrative for Patni’s minority shareholders.
As far as business prospects go, while the acquisition looks good on paper, it remains to be seen if it actually results in better growth prospects. And the argument about achieving scale doesn’t apply from a Patni stakeholder’s perspective—after all the size of business was already at around $700 million and would now rise to around $1 billion.
From iGate’s perspective, however, the deal will result in a big leap. Its consolidated revenue would nearly quadruple, which is significant because in the current environment, small-sized firms are losing market share. And while the deal size of $1.22 billion looks very large for a firm with a balance sheet size of merely $287 million, funding the deal and servicing the acquisition debt shouldn’t be much of a problem.
PE firm Apax Partners Llp has agreed to buy preferred stock worth $270 million in iGate and may increase its total investment to $480 million using the same instrument. The preferred stock will have a proposed dividend of 8%, have a tenure of six years and is optionally convertible into equity stock after two years. Besides, the company would raise debt funds worth $700 million to fund the deal. Assuming an 8% servicing cost on the entire amount, although the cost of debt would be lower in overseas markets, the cost of the acquisition financing would be less than $100 million. In the 12-month period ended September, Patni’s free cash flow after accounting for capital expenditure was around $130 million. Its Ebitda (earnings before interest, tax, depreciation and amortization) stood at around $150 million.
But clearly, just being able to comfortably fund the transaction isn’t sufficient to make the acquisition successful. Much depends on how well the iGate management does in integrating the operations of a much larger firm with itself.