Mumbai: Mindtree Ltd’s board on Tuesday scrapped a share buyback proposal that was aimed at preventing a hostile takeover by the country’s largest engineering company, Larsen and Toubro Ltd (L&T). The move may make it easier for L&T to gain control of Mindtree, controlling shareholders of which have been resisting a takeover by the engineering behemoth.
L&T announced on 18 March that it would launch an open offer to buy an additional 31% of Mindtree after agreeing to buy a 20.32% stake from the company’s largest shareholder group that includes Café Coffee Day founder V.G. Siddhartha and two of his affiliate firms for ₹3,269 crore. L&T also said it would buy a 15% stake in Mindtree from the open market.
Following a board meeting on Tuesday, Mindtree said it would not proceed with a plan to buy back its shares and the company’s newly formed independent directors’ committee would start working on recommendations for Mindtree shareholders with regard to the L&T open offer. Mint first reported on Tuesday that Mindtree was unlikely to proceed with its buyback plan.
“… the board invited views from the company’s directors on the unsolicited offer (open offer) made by L&T and after a deliberation, the board has decided to immediately constitute the committee of independent directors (IDC) in the interest of all stakeholders to provide their reasoned recommendation in respect of the unsolicited offer by L&T," Mindtree said in an exchange filing. “All the independent directors will be members of the IDC, and the IDC has elected Apurva Purohit, lead independent director, as the chairperson of the IDC."
In an emailed response to a query, Purohit said “the committee will deliberate on the open offer using the advice of an independent legal counsel and financial advisors who will be appointed shortly to assist the IDC".
In a separate exchange filing, L&T said the purpose of acquiring control of Mindtree is mainly to grow the revenue and profit of its asset-light services business portfolio, thereby increasing its consolidated return on equity.
“The acquisition is expected to be value accreting for both the acquirer’s (L&T) shareholders and the target company’s (Mindtree) shareholders in the medium to long term," L&T said.
The market has been abuzz with talk of a potential stake sale by Siddhartha and an eventual takeover of Mindtree since May last year. The race for Mindtree gathered momentum in November, when Siddhartha officially announced his intention to exit Mindtree.
However, the real battle for Mindtree started last week when L&T announced its decision to buy Siddhartha’s stake and acquire control of Mindtree.
Mindtree’s co-founders have been maintaining that the company’s top management under chief executive Rostow Ravanan is being fully backed by the entire board and several large shareholders.
Nalanda Capital, Mindtree’s largest institutional shareholder, has said that L&T’s bid for the IT company will be damaging for stakeholders, The Times of India reported on Tuesday, citing a statement issued by the investor.
Still, some analysts say it will be tough for Mindtree’s founders to retain control of the company.
“The writing is on the wall," said a Mumbai-based analyst at a domestic brokerage. “Two things can play out from here. First, the shareholders reject the open offer at this price. Then, L&T can revise upwards its open offer price to win support from shareholders. This means that the takeover may take some time. Second, the board comes to a dispassionate conclusion, that they find L&T’s price in the interest of minority shareholders. In both scenarios, the end result appears to be stacked against the founders."
For now, L&T wants Mindtree to remain listed and function independently. But, on 19 March, in an investor presentation, L&T mentioned that it might consider a possible merger of Mindtree with L&T Infotech Ltd and L&T Technology Services, once the combined revenues from the three entities cross the $5 billion threshold.
On Tuesday, L&T said if it intended to alienate any material asset of Mindtree within a period of two years from the date of completion of the open offer, a special resolution of the shareholders of Mindtree would be taken.
Also, as per the share purchase agreement between Siddhartha and L&T, Siddhartha and his affiliates have undertaken that till the date of closure of the takeover deal, they will vote against any resolution or transaction by Mindtree that impedes the L&T deal.
L&T said it will file its draft letter of offer with the Securities and Exchange Board of India for the Mindtree takeover on 2 April, while Mindtree’s IDC could send its recommendations to the shareholders by 10 May. L&T has the option to raise the open offer price or the offer size till 13 May.
“I expect L&T to settle with 35-40% of shareholder support post the closure of the open offer," said Shriram Subramanian, founder and managing director of proxy advisory firm InGovern Research.