Why V.G. Siddhartha went with L&T, ignoring Mindtree promoters

New Delhi: When V.G. Siddhartha agreed to sell the 20.32% stake owned by him and his two affiliates in Mindtree Ltd to Larsen and Toubro Ltd (L&T) at ₹980 a share, the founder of Cafe Coffee Day earned only ₹16.7 crore more than the second-highest price of ₹975 a share offered by a global private equity (PE) firm.

Even more surprising is that the four promoters of Mindtree Ltd, led by chairman Krishnakumar Natarajan and chief executive Rostow Ravanan, repeatedly expressed their reservations to Siddhartha about him selling the shares to India’s largest engineering and construction company.

Siddhartha was forced to sell his stake because of a liquidity squeeze that was triggered by defaults in payments by Infrastructure Leasing and Financial Services Ltd (IL&FS) in August. It led to his lenders calling in their loans against which his almost entire holding in Mindtree had been pledged. The promoters of Mindtree now run the risk of losing control of the company they founded.

Siddhartha, who first invested about $8 million when Mindtree was founded in 1999, and, in the ensuing two decades, went along happily with the decisions made by the other promoters, found the lenders unwilling to roll over his considerable debt of about ₹3,000 crore.

With repayment deadlines fast approaching, he needed to monetize his holding in Mindtree at the earliest. At least a dozen PE players (read about them here and here), sovereign funds and long-term funds were only too happy to buy his stake worth ₹3,000 crore, a senior executive of Mindtree said on condition of anonymity.

The catch was that Siddhartha’s shares had already been pledged to the banks, and, for any sale to take place, the potential buyer needed to pay for the unpledging of the shares before buying them or at least agreeing to an arrangement wherein the shares stayed with the banks even while the transaction to sell them was underway.

Also read: L&T storms Mindtree gates, but its own investors feel the heat

In an emailed reply to specific queries on the issue, Siddhartha said: “I would like to state clearly that the shares that are held by me and my companies in Mindtree have been pledged with a single lender for ease of selling the same post all prerequisite approvals are obtained. As a matter of policy we have not and do not intend to sell fully or partly any shares in the subject company or seek a loan against such security from the interested purchaser till all regulatory approvals are obtained.”

Thus, beginning December, while almost a dozen storied firms met with him and the management of Mindtree to understand the contours of the asset they were buying into, a deal just couldn’t happen as none of them was willing to pay unless the shares were transferred.

Also read: A culture shock awaits Mindtree employees under L&T

As most of them were large multinational firms, their charter itself would have prevented them from doing so.

To be sure, Mint has learnt that just two weeks before the announcement by L&T—the last week of February—a global PE firm was very close to finalizing the deal with Siddhartha, following a series of meetings. Mindtree’s other promoters had even agreed to its terms, including a position on the board.

Also read: The Mindtree stake sale is not the caffeine kick Coffee Day needs

While L&T finally agreed to buy Siddhartha’s stake at a declared price of ₹980 per share, the earlier offer, which was clearly preferred by the Mindtree promoters, was ₹975.

Only 10 months back, in May last year, Siddhartha told Mint that he remained committed to Mindtree, as he expected the company to more than double its revenue to $2 billion by 2023. Natarajan, in a separate interview then, went a step further and said Siddhartha’s 20% in Mindtree and the promoters’ 13.2% equity should be seen as “one” or “33.8%” because “Siddhartha won’t do anything that even marginally puts Mindtree at risk”. “That we are very, very comfortable with,” said Natarajan.

Also read: Mindtree battle enters final decisive phase

However, four months later, in August, the IL&FS crisis came to the fore when one of its group companies failed on its debt payments.

Siddhartha, facing huge financial pressure, decided to sell his stake to L&T, leaving Mindtree vulnerable to a hostile takeover.

The deal with the PE firm likely fell through because it wasn’t willing to get into the complicated mechanics of the transaction. Enter L&T, and while the details of the pre-deal transactions between L&T and Siddhartha are not known, it is safe to assume that the latter was agreeable to the more complex transaction.

An email sent to L&T seeking comment went unanswered.