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Patni Computer UNDERPERFORMER
iGATE-Apax to acquire majority stake in Patni
Event – promoter stake sale to iGATE-Apax
The promoter group of Patni Computer Systems (Patni) and General Atlantic Mauritius Limited (GA)
have entered into share purchase agreements (SPAs) to sell their combined ~63% stake in Patni to USheadquartered
software firm iGATE, backed by private equity firm Apax Partners, at Rs503.5/share.
Relevant details of the transaction
♦ The transaction value of the stake sale would be US$921m and will not have a non-compete fee
attached. Including the open offer, the total transaction value is estimated to be US$1.22bn.
♦ iGATE will make a mandatory open offer to the public shareholders of Patni, in accordance with
SEBI requirements, to purchase up to 20% of the fully diluted share capital of the company. The
stake sale is subject to various regulatory approvals and will take another six months to complete.
♦ iGATE will fund the transaction by: 1) issuing convertible equity of US$270m-480m to Apax
Partners depending on the outcome of the open offer; 2) issuance of common equity of up to
10m shares; and 3) raising US$700m debt (from Royal Bank of Canada and Jefferies &Co) and
using an existing US$50m revolving line of credit.
♦ Patni will continue to be a listed entity for some time and iGATE would be its majority
stakeholder. iGATE, however, intends to merge the companies in the medium-to-long term.
Pro-forma view of merged entity
♦ The merged entity will have revenues of US$719m and EBIT of US$138m for 9-months of CY10.
♦ The total number of employees will be ~25k.
♦ The entity would have two US$100m+ clients, two US$50m+ clients and 36 US$5m+ clients.
Will iGATE change Patni’s fortune?
Patni’s USD revenue CAGR for CY07-10E was 2%, while iGATE’s revenues grew by ~12% in the
same period. This was lower than the Indian IT industry’s growth rate of ~14%. The iGATE
management believes that post the stake sale, the combined entity would post better growth rates,
as: 1) it would have combined revenues of US$1.2bn, which would enable it to participate in high-
TCV deals (>US$25m); 2) the companies have little client overlap (just two common clients – GE, of
which both companies are preferred vendors, and a small client in Europe). Hence, there will be a
larger pool of accessible clients to cross-sell services; 3) the companies’ service offerings in various
verticals compliment each other (e.g., Patni lacks depth in BFS services, an area of strength for
iGATE); and 4) Phaneesh Murthy, iGATE’s CEO, has a track record of turning around iGATE.
However, we expect growth to be long drawn due to integration challenges. The new entity will
have to ensure both employee and client retention post merger. In the near-term, we do not see
synergies emerging from this deal.
Our view – exit during open offer
The stock currently trades at ~13x CY11E EPS. In the recent past, we have been cautious on the stock
due to Patni’s weak business model – an ADM-heavy portfolio and sub-scale presence in growth
service lines – which has led to performance lagging larger peers/ industry even in good times. There
remains a near-term trade of ~4% as the stock is ~8% below the offer price. But from a 12-month
view, we retain our Underperformer rating on Patni with a price target of Rs430 (based on 12x
CY11E EPS). We recommend investors to exit during the open offer.
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