Engineering and construction conglomerate Larsen and Toubro Ltd (L&T) has initiated talks to acquire a stake in Mindtree Ltd, joining two private equity (PE) firms and Japan’s NEC Ltd which have also shown interest in the software services company.
L&T is discussing with Café Coffee Day (CCD) founder V.G. Siddhartha the possibility of buying the 20.4% stake held by Siddhartha and two CCD affiliate firms in Mindtree, said two people with direct knowledge of the matter.
The talks are also focused on L&T’s plan to buy an additional 5% stake either through an open offer or directly from the promoters of Mindtree, the people said, requesting anonymity.
They said L&T’s plans for Mindtree were devised a week ago, primarily with the objective of creating an IT consulting and services giant through a merger of Mindtree, L&T Infotech Ltd and L&T Engineering Services Ltd.
“The discussions between L&T and Siddhartha are at an early stage but things are moving fast," said the first person cited above.
After acquiring a controlling stake in Mindtree, L&T will most likely merge the company with Mindtree’s current and larger rivals L&T Infotech and L&T Engineering to create a company large enough to compete with Infosys, TCS, Wipro and HCL, the person said.
“As part of business strategy, the company does explore various opportunities towards growth. Having said that, your query is entirely based on market rumours. As a policy, we do not comment on speculation," said a spokesperson for L&T.
L&T is not the only suitor for Mindtree. Over the past six months, NEC and buyout PE funds KKR and Co. and Baring PE Asia too have evinced interest, but the talks have not fructified yet because the Mindtree promoters have been reluctant to pare their stake.
Mindtree’s promoters hold a total of 13.32%, with chairman Krishnakumar Natarajan holding 3.72%, co-founder Subroto Bagchi holding 3.1%, N.S. Parthasarathy holding 1.43% and the CEO Rostow Ravanan holding 0.71%.
“L&T has two options. L&T can just buy Siddhartha and his two firms’ stake and wait for the promoters to agree to sell their stake to L&T at a later stage to enable the latter to make an open offer for gaining control. Or, L&T can buy the 20.4% holding from Siddhartha and if the promoters continue to be reluctant, L&T can buy more shares of Mindtree from the public in the open market whenever the shares correct and increase their holding beyond 25% to get the open offer triggered so that L&T is able to buy at least 26% more to be able to force a takeover of Mindtree," said the second person.
On 15 January, Mint reported that the promoters of Mindtree are now faced with stay-or-sell dilemma as the company’s largest investor nears a decision to sell his stake. They can either accept buyout offers and cede control, or decide against selling and see their net worth potentially erode, said the report.