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Hold your fire till Q4CY10 earnings…
iGate-Apax partners combine announced the acquisition of ~63% stake
held by Patni brothers for | 503.5 per share. With the mandatory 20%
open offer, the total consideration could top US$1.22 billion. The Patni
management has indicated that the non-compete fee, if any, could be
reserved between promoters and buyers. The open offer price, between
March 4-23, has a modest ~8% premium relative to the current market
price. Though management rationale for acquisition suggests growth
synergies, distraction of management focus, integration, attrition and
customer retention would be key catalysts to watch.
ƒ Billion dollar entity in the making
Patni Computers has announced that the founder brothers (~45.6%
stake) and General Atlantic (~17.4%) have agreed to sell their stake
to iGate at a price of | 503.5 per share or $921 million for their stake.
Further, this would trigger a 20% open offer (at | 503.5 per share)
for minority shareholders. On successful completion of the open
offer, iGate will end up with ~83% stake in the company. The
merged entity with likely ~$1 billion in revenues could enhance
growth by participating in large deals across service lines.
ƒ Funding of transaction (for iGate)
iGate expects to finance the purchase of ~$1.22 billion through a
combination of cash in hand (~$100 million), debt (~$700 million)
and preferred convertible equity to Apax (~$270-$480 million). Apax
Partners’ equity stake in the company will depend on the success of
the open offer. As a reminder, as on September 30, Patni has ~|
1421 crore cash on its balance sheet.
ƒ Existing management roles unclear: Tough for integration
Given the large size of Patni against iGate, we believe integration will
be a major challenge for iGate. There is not enough clarity on Mr
Jeya’s (CEO) and Mr Surjeet’s (CFO) roles, whose efforts towards a
better managed Patni franchise, were yielding results.
Valuation
We continue to value Patni at | 516 i.e. at 12.1x CY12E EPS of 42.7
as we await clarity on pending issues such as delisting and reverse
merger. We believe Q4CY10 earnings ahead of the open offer date
would be a good time for a rating update.
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