A potential deal with Baring is, however, conditional upon the private equity firm gaining a controlling interest in Mindtree, said the two people, requesting anonymity.
“Baring PE Asia is very keen to buy a majority stake in Mindtree if such a purchase comes with board control. The valuation of the deal is based on Mindtree’s six-month weighted average price of ₹ 962 per share on the stock exchanges. However, it is a conditional deal proposed by Baring Asia," said one of the two people cited above.
“The promoters may ultimately agree to pare their stakes, considering the valuation they are getting at a time when the near-term outlook on midsize IT services firms continues to be negative," the person said.
“If the acquirer commits that it will not make significant changes in the management post the acquisition, the promoters, who hold less than Coffee Day firms, may agree to monetize their stake, resulting in an open offer," he said, adding complete clarity on the buyer is expected in January.
The promoter group includes co-founders such as Krishnakumar N. who holds a 3.72% stake, Subroto Bagchi (3.11%), N.S. Parthasarathy (1.43%) and Rostow Ravanan (0.71%).
A spokesperson for Baring PE Asia declined to comment, while an email and text messages sent to Siddhartha remained unanswered.
Mint reported first on 6 December that Mindtree’s largest investor and Coffee Day founder Siddhartha, two firms controlled by him and a few other large shareholders are looking to sell their stakes in the Bengaluru-based IT company. PE firm KKR and Co., too, has evinced interest in buying a large stake in Mindtree, according to the report.
To be sure, Mindtree’s stake sale discussions have been on for more than five months. In June, Mint reported that Japan’s NEC Corp. and a global private equity fund were in initial talks to take a controlling stake in Mindtree. The Economic Times on Thursday reported that NEC is competing with buyout funds like KKR and Advent International to buy 20.3% of Mindtree.
“Siddhartha, who knows Mindtree board well and was associated with it for long, has been asked by Baring PE Asia to convince some of the promoters to sell their stake to Baring PE Asia so that Baring is able to buy at least 26% in Mindtree. Siddhartha has been asked to ensure that enough number of smaller shareholders or promoters agree to sell their stake," said the first person.
“Baring Asia has held at least two meetings with Siddhartha on the proposed deal in the past fortnight," said the second person.“With the largest shareholder exiting, the promoters who hold a total of around 12% are in a dilemma whether it is logical to hold on because typically in the event of a bulk stake purchase, an open offer and consequent acquisition of control, buyers often agree to pay a much better premium to the shareholders (on the prevailing market price) rather than during stake purchases in small tranches without any control," he said.
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The board of Mindtree is said to be examining whether it makes sense to transfer the management control to a long-term strategic partner (through a merger or takeover) or to a PE firm. This is because PE firms may often pay more than a long-term strategic player but they often do not stay invested in a single firm for over five years, leaving the company hunting for a fresh promoter again, said the person, who works closely with Siddhartha.
“If the promoters do not agree to sell their stake to Baring PE Asia, the latter will now buy 21% from Siddhartha and CCD’s associate firms, secure a board seat and after six months, Baring PE Asia will buy more from public shareholders in the market to acquire up to 26% in order to gain a controlling interest through an open offer," said the first person.
Siddhartha, who joined the board when he first invested in Mindtree in 1999, stepped down as an independent director in March, triggering speculation that he may cash out on his investments and re-deploy the cash to scale up Cafe Coffee Day’s operations.
Siddhartha, Coffee Day Enterprises and Coffee Day Trading Ltd hold a little less than 21% stake in Mindtree, while, through a number of other entities, Siddhartha and his coffee ventures hold a total of around 26% in Mindtree, which commands a six-month average market cap of ₹ 16,000 crore. Mindtree’s revenue increased 4.3% to ₹ 5,463 crore in the year ended 31 March 2018. Net profit rose 36% to ₹ 570 crore. The proposed deal is attributed to changes in the macroeconomic trend.
“Earlier, Mindtree had a good run on the stock price because the rupee was very weak and getting weaker. But now the trend has changed especially with the rupee strengthening against the dollar. Today, when you are buying a tech company you are not buying offshore cost arbitrage, but the digital edge. We are in an era of AI, cloud computing, hashtag, IIAS (inventory information approval system) etc., all of which require programming skills and dependence on high quality labour," said an analyst at an international research firm.