Mumbai: The promoters of Mindtree Ltd are now faced with something of a Hobson’s choice as the company’s largest investor nears a decision to sell his stake. They can either accept buyout offers from one of three suitors—private equity giant KKR and Co., Baring Private Equity Asia Ltd and a foreign software services provider— and cede control or decide against selling and see their net worth potentially erode.
The urgency to finalize a buyer is due to the planned stake sale by V.G. Siddhartha and companies controlled by him, according to two people with direct knowledge of the discussions between the potential buyers and the company.
“Since Mindtree’s largest investor and Café Coffee Day’s (CCD) founder, V.G. Siddhartha, along with two of his firms, have decided to sell their stakes within a month’s deadline, the promoters are compelled to decide in the next two weeks whether they should agree to sell a part of their holdings to the buyer, along with Siddhartha, or just let the buyer purchase shares from the market and force an open offer in order to gain control in Mindtree," said one of the two people, requesting anonymity.
Siddhartha and Coffee Day Enterprises Ltd and Coffee Day Trading Ltd own about 21% in Mindtree, which has a six-month average market value of around ₹ 16,000 crore on BSE.
Analysts are expecting Mindtree to post weak earnings in the December quarter. Prabhudas Lilladher forecast December quarter net profit to dip 7.3% quarter-on-quarter (q-o-q) to ₹ 191.2 crore, though net sales are likely to rise 1.8% to ₹ 1,787.7 crore. Dolat Capital, another brokerage, expects Mindtree’s profit in the last quarter to fall 1% q-o-q to ₹ 204.3 crore, while net sales are forecast to rise 2.9% q-o-q to ₹ 1,807.1 crore.
“The promoters are adamant about holding on but a better play will probably be a suitable strategic buyer who can bring stability, attract good talent in terms of people and also call on large corporations to outsource technical work," the head of research at a large domestic brokerage said on condition of anonymity.
“Smaller IT firms have been unable to compete with the larger ones in bidding for large contracts. A strategic buyer will however be a game changer for Mindtree minority shareholders, employees and lastly the clients", he added.
Meanwhile, KKR in a meeting with the promoters of Mindtree last week, offered up to ₹ 850 a share to take a majority stake in the company and become a co-promoter.
On Tuesday, shares of Mindtree closed 0.4% higher on BSE at ₹ 854.90.
KKR’s proposal is to buy Siddhartha and his companies’ stake first and buy a portion of the promoters’ stake at the same price on the condition that the US-based private equity firm is given special control on the board and the management of Mindtree, said the second person.
The special rights demanded by KKR include the right to appoint the managing director and chief executive, independent directors, get multiple board seats, the power to choose or refuse clients for Mindtree, make changes in the management and the business in order to grow Mindtree’s digital capabilities to increase the firm’s competency and revenues, the person said.
A spokesperson for Mindtree declined to comment, citing the so-called silent period before the announcement of quarterly results on Wednesday.
A KKR spokesperson said the company does not “comment on market speculation".
Baring PE Asia and Siddhartha did not respond to emails.
Apart from KKR, a large foreign IT services firm has evinced interest to acquire control of Mindtree by buying Siddhartha’s shares and the ones held by his firms and the promoters, according to the two people. On 27 June, Mint reported that Japan’s NEC Corp. is in initial talks to acquire a controlling stake in Mindtree.
The first person cited earlier said the promoters of Mindtree, in a board meeting on Wednesday, plan to deliberate on finalizing a buyer, besides the financial results for the December quarter.
The first person said Baring PE Asia had offered to pay a higher price than KKR. Baring has offered ₹ 900 apiece for buying the shares of Siddhartha, his CCD affiliate firms, as well as Mindtree’s promoters, who hold a total of 13.32%, with chairman Krishnakumar Natarajan holding 3.72%, co-founder Subroto Bagchi holding 3.1%, N.S. Parthasarathy holding a 1.43% and the CEO holding 0.71%.
Unlike KKR, Baring Asia hasn’t demanded any special rights. However, the promoters of Mindtree are reluctant to transfer control to Baring Asia as the latter has demanded an eventual merger of Mindtree with Hexaware Technologies Ltd (in which Baring PE now holds 62.79% through HT Global IT Solutions Holdings), said the first person.
“Baring Asia wants to merge Hexaware with Mindtree because they are finding it tough to monetize their stake directly. Through the merger, Baring will be able to dilute its stake in Hexaware, which is so expensive right now (as compared to its earnings growth) that it is difficult to find a buyer," said the first person.
On 24 August, Baring PE Asia sold 8.4% in Hexaware for around ₹ 1,120 crore as part of its plan to monetize its holdings in the company.