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Patni Computers |
Search for Buyer Ends |
NOT RATED
CMP: Rs 464 Target Price: N.A.
n Patni’s search for buyer finally ends with Patni board accepting iGate’s offer for purchase at Rs 503.5/share. Offer values Patni at ~12.5x/14.3x Dec’10E/Dec’11E earnings.
n Open Offer for minority shareholders in April’11. In the interim, mgmts of the 2 entities remain focused on seamless integration and fast tracking joint ‘go to market’ strategy
n Min. acceptance ratio at ~54% (if all shareholders tender). Stock could continue to command a delisting premium given the likelihood of promoter holding at ~83% post open offer)
n Strategically beneficial for iGate on a/c of scale benefits, cross selling opportunities ,reduced client/vertical concentration
Transaction details
Patni board has given nod to iGate’s offer for purchasing ~63% stake in the company at
~Rs 503.5/share finally bringing to an end to the impending stake sale plan of the
promoters for over a year. As part of the agreement, iGate –Apax partners would buy
promoter’s stake (46%, note that no non compete premium for the promoters) and GA’s
stake(17%) for a total consider of US$ 921 mn. Note that there is no ‘non compete
premium’ as had been speculated by the media. Co mgmt indicated that all efforts
would be focused on seamless integration over the next 90 days with special emphasis
on driving’ joint go to market’ synergies. The transaction is expected to be completed in
H1CY11 with the open offer expected in April’11. Our calculations suggest that in case
all minority shareholders participate and tender in the open offer, the acceptance ratio
would be ~54%.
Strategically beneficial for iGate
We see post the transaction; iGate would enjoy a more favorable competitive
positioning driven by (1) scale benefits ( revenues for the combined entity to move up
to ~US$ 1 bn+ p.a , in line with iGate’s goals of achieving revenues of US$ 1 bn by
FY12), (2) cross selling opportunities on account of minimal client overlap between
the two entities (Patni and iGate have only 2 clients in common – top client GE and
another small European customer, also would be a key focus area given Patni’s anemic
client mining skills despite having several Fortune 500 clients), (3) reducing client
concentration for the combined entity ( iGate derived ~54% of revenues from it’s top 2
clients in 9MCY10 V/s 36% of revenues coming from top 5 client for Patni and (4)
reducing vertical concentration for the combined entity ( iGate derives ~61% of
revenues from Banking/Fin Svcs vis-à-vis 42% for Patni) as well as access to newer
verticals like retail, telecommunication and manufacturing.
Patni could continue demanding a delisting premium in the medium term
We believe that Patni could continue commanding a delisting premium in the medium
term given the fact (1) promoter holding would be ~83% (in case of a 100% successful
open offer, over and above SEBI mandated limit of 75%), and (2) iGate mgmt indicated
that a US listing remains it’s preferred option.
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