Citi: Sell Patni Computer Systems: Contours of the iGate Deal

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Patni Computer Systems (PTNI.BO)
Sell: Contours of the iGate Deal
 Deal with iGate announced — Patni today announced that the three Patni
brothers holding ~45.6% and General Atlantic (GA) holding ~17.4% (including
ADRs) have reached an agreement to sell their stake to iGate Corp. for a
consideration of Rs503.5 per share (deal size: ~$921m). There is no provision for
any non-compete fees and the deal is expected to close by 1HCY11. The deal
values Patni at ~14x CY11E EPS.
 Open offer triggered — According to SEBI rules, iGate will have to make an open
offer for an additional 20% stake in Patni at the same price. If the open offer is
successful, then iGate will end up holding ~83%. The acceptance ratio will depend
on the number of shares tendered which in turn is likely to be driven by the
timing/price of purchase and taxation (open offer is an off-market transaction).
 Creation of a ~$1bn entity — We expect Patni to clock ~$700m of revs in CY10
while the consensus expectations for iGate is ~$280m. Thus the merged entity will
be ~$1bn in revenues, which should enable it to participate in larger deals going
forward. iGate expects the transaction to be cash accretive only by 2012.
 Details of funding (for iGate) — At the end of 3QCY10, iGate had ~$125m of
cash while Patni had ~$320m. iGate proposes to raise $700m of debt from Royal
Bank of Canada (also a client) and Jeffries and Co. It also has a revolving line of
credit of $50m. Additionally it plans to issue equity to the tune of $270-480m
(depending on the success of the open offer) to Apax Partners (its consortium
partner). The interest burden will be significant given the size of the P&L.
 Maintain Sell — The deal has been rumored for a while - the final price is below
what was expected (in the press). Integration is always a challenge - the synergies
will take time to play out. In the interim, we believe that, with the management
focus on the integration, growth could continue to be a challenge. Delisting from
Indian exchanges (and expectations of a premium for the same) could be a
medium-term catalyst – and is a risk to our negative view.


Patni Computer Systems
Valuation
Our target price of Rs465 is based on 13x Mar'12E EPS. This is closer to the
higher end of the ~2-16x band that the stock has traded in over the past threeyears
and is higher than the average of ~8x. We believe that this is justified
given that revenue visibility is improving (across the sector) and Patni has
made some good effort in cost cutting. We believe PE is the most appropriate
valuation measure to value the stock given Patni's track record in profitability.
Risks
We rate Patni shares Medium Risk in line with our quantitative risk-rating
system, which tracks 260-day historical share price volatility. Key upside risks
that could cause the shares to exceed our target price include: (1) uptick in
growth rates; (2) any significant depreciation of the rupee against the
USD/EUR/GBP; (3) sharp recovery in the US economy; and (4) any valuegenerating
acquisition.