iGate Set To Shell Out More As Patni's Final Price Tag May Reach $1.5B

Apax Partners-backed iGate has initiated the process to buy out the minority shareholders of Patni Computer Systems to make it a wholly owned Indian arm and the move might cost it an additional $260 million or even more, according to VCCircle estimates.

NASDAQ-listed iGate completed its open offer to acquire 20 per cent stake in Patni Computer, pushing its total equity holding to 83 per cent in a deal worth Rs 5,543 crore ($1.24 billion) in May this year. The transaction, backed by the buyout giant Apax Partners, involved exit of the promoters "the Patni brothers – along with the nearly decade-old private equity investor General Atlantic, in one of the largest M&A deal in the Indian IT/ITES space.

iGate's deal with the promoters and the PE investor amounted to Rs 4,179 crore and it shelled out Rs 1,363.75 crore in the open offer, taking the total investment value to around Rs 5,543 crore.

According to a disclosure, Patni Computer said that it had received a proposal from iGate for delisting the equity shares of the company from Indian stock exchanges as well as delisting of the American Depository Receipts (ADRs) from the New York Stock Exchange.

iGate currently owns 80.4 per cent of the current paid-up equity share capital of the company (directly and indirectly) on a fully diluted basis. That leaves 12.5 per cent of the fully diluted equity share capital, held by the public shareholders, in addition to 7 million underlying ADRs and 2.6 million employee stock options outstanding.

The acquirer has given an indicative floor price of Rs 356.74 a share, which is around 29 per cent less than the previous open offer price. This may well be based on the recent quoted price of the scrip. Patni Computer scrip shot up in early morning trades and was quoting at Rs 418.2 a share at noon on the BSE on Thursday, up 7.6 per cent from the previous close.

Although at the disclosed floor price of Rs 356.74 a share it might cost Rs 954 crore to buy the remaining shares, at the previous open offer price, the total cost of acquisition for iGate will get pushed up and will be around Rs 6,889 crore ($1.35 billion in current exchange rates and around $1.5 billion, given varying exchange rates for the multi-tier transaction).

If the previous open offer price of Rs 503.5 a share is taken as a benchmark for the exit offer to remaining shareholders, it will cost iGate another Rs 1,346 crore or more (if it needs to lure all shareholders including conventional punters who wait for such delisting opportunities to drive a hard bargain) to buy the remaining 19.6 per cent of Patni.

The final price would, of course, be decided through a reverse book-building route.

However, it is only fair to assume that iGate may not get many takers at that price and it will have to, in all probability, raise the price to make the deal a success. Since iGate is already on the driver's seat and looking at a delisting offer within months of completing an open offer, it essentially shows how desperate it is to make Patni a wholly owned firm. And that fact would not escape the notice of the remaining shareholders.

The other possibility is that iGate will cross 90 per cent aggregate holding in Patni which will still allow it to delist the shares from Indian exchanges as per the existing norms. But even then, it will require to shell out an additional $130 million to delist Patni.

Strategy & Deal Finance

The deal will give iGate a delivery platform in India and allow the combined entity to bid for contracts along with the IT majors.

VCCircle had earlier indicated that a delisting could be on the cards and it would be a natural extension of the move to acquire a majority stake in Patni.

Earlier, iGate CEO Phaneesh Murthy said that over the long term, one listed company would be better for all stakeholders. Referring to iGate's existing US-traded shares, he had added, "We would prefer to be listed on the US exchange."

iGate had earlier said that Apax would invest up to $480 million in iGate through its entity Viscaria Ltd. Viscaria will invest $270 million through preferred stock in the first leg of the transaction. This preferred stock will be convertible into common stock with a conversion price of $20.30 per share. It can also invest an additional $210 million, depending on other factors such as success of the (now complete) open offer and whether iGate goes ahead with a public offer of its own for further issue of shares.

On Wednesday (Nov 16), the firm has disclosed that it is looking at a debt facility of around $215 million for bankrolling the transaction that it expects to close by mid-2012. If it indeed goes ahead with the debt finance for the last leg of the deal, Apax may not be investing fresh as indicated above.