Tech Mahindra, which already owns 43 percent of Satyam, will swap two of its shares for every 17 held by the company’s other shareholders, according to a statement today. That values Satyam at 76.3 rupees a share, or 89.9 billion rupees ($1.8 billion), at yesterday’s closing price of 74.15 rupees, according to data compiled by Bloomberg.
Today’s agreement ends a three-year process that began with the government firing Satyam’s board after its founder chairman revealed a 100 billion-rupee accounting fraud. The acquisition will more than double Tech Mahindra’s revenue and reduce its dependence on London-based BT Group Plc (BT/A) by giving it access to new clients in industries such as financial services and retail.
“Tech Mahindra’s biggest issue is that their biggest client is British Telecom,” said Ajay Parmar, co-head of investment banking at Emkay Global Financial Services Ltd. in Mumbai. “If you have more dependence on one client, and that guy backs out, your business collapses. This deal decreases their risk by giving them access to new verticals.”
BT Group currently contributes 35 percent of Tech Mahindra’s revenue, Chief Financial Officer Sonjoy Anand said at a press conference today. That will fall to about 19 percent in the combined entity, he said.
Tech Mahindra, based in the western Indian city of Pune, maintains computer systems and writes software programs for BT Group, the U.K.’s largest Internet service provider. BT Group will own a 13 percent stake in Tech Mahindra after the merger with Satyam is complete, from 23 percent at present.
BT Group sold 5.5 percent of Tech Mahindra in December 2010, and said at the time that it will consider further stake sales.
Satyam gained 4.7 percent to 77.65 rupees at close in Mumbai, the biggest increase since Jan. 27. Tech Mahindra added 5.6 percent to 685.10 rupees, the highest level since Sept. 8.
“This will bring us into the category of the big boys,” Vineet Nayyar, vice chairman of Tech Mahindra, said at a briefing in Mumbai today.
India’s $88 billion outsourcing and software services industry is led by Tata Consultancy Services Ltd. (TCS), which had revenue of 373 billion rupees last financial year. Tech Mahindra-Satyam will have sales of $2.3 billion (121.6 billion rupees), according to the statement. That ranks it fifth in terms of sales behind HCL Technologies Ltd. (HCLT) among Indian code writers, according to data compiled by Bloomberg.
Mahindra Group, Tech Mahindra’s largest shareholder and owner of India’s biggest maker of utility vehicles, will hold a 26.3 percent stake in the merged company, Tech Mahindra said in the statement. The merged entity will hold 10.4 percent stake in itself as treasury stock.
Satyam, based in Hyderabad, reported sales of 51.5 billion rupees in the year ended March 31, compared with Tech Mahindra’s 51.4 billion rupees of revenue, according to data compiled by Bloomberg. The combined company will have 18 billion rupees of cash, some of which it will use for acquisitions, Tech Mahindra’s Anand said.
Tech Mahindra bought a 34 percent stake in Satyam in an April 2009 auction after former Chairman Ramalinga Raju revealed the accounting fraud and resigned.
The scandal led to an exodus of customers at Satyam, whose shares have fallen 57 percent since Jan. 1, 2009, six days before Raju said he falsified accounts.
Raju was charged with faking invoices, inflating the company’s tax liability and understating debt. India’s top court granted Raju bail in November 2011.
Ernst & Young LLP and KPMG LLP were the independent valuers for the deal, according to the statement. JP Morgan Chase & Co and Morgan Stanley issued fairness opinions on the swap ratio, while Enam Securities Pvt. and Barclays Plc acted as advisers to Tech Mahindra.
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