After 26 years of association with the Mahindra and Mahindra group, UK’s leading telecommunications player BT today kicked off its exit process from Tech Mahindra (TechM).
M&M today said it had agreed to buy a 5.5 per cent stake in TechM from BT. Though the company did not say how much it would pay for the stake, according to exchange data — based on a weighted average price of Rs 638.76 a share — it could be worth at least Rs 433 crore.
The entire chunk of BT’s 30 per cent stake in TechM at current price will be worth around Rs 2,356 crore.
BT’s stake, which is around 30 per cent at present, will come down to 24.5 per cent after the stake sale. But M&M has waived its right to buy the rest of BT’s stake, potentially paving the way for BT to sell part or all of its holding to other investors and raise much-needed funds as it struggles with a huge pension deficit.
In a statement, BT said further stake sales may be considered, but it expects to continue to have a shareholding in TechM “for some time”.
BT also soothed concerns that TechM could end up losing its status as a preferred outsourcer for BT, its main client, by saying that TechM will continue to be a key strategic supplier.
BT and M&M established the joint venture that became TechM in 1986. With the 5.5 per cent stake acquisition, the auto major’s stake in TechM increases to 48.3 per cent.
Analysts tracking the company said even after M&M acquires the stake, BT will find it tough to find buyers for a chunk of the shares.
“The fact that M&M has chipped in to buy the initial stake and has no further intent to spend some more money in increasing its shareholding in the company, is an indication that BT will find it tough to sell the remaining stake. Finding interested investors is a tough call,” said Jagannadham Thunuguntla, equity head of SMC Capitals.
“That BT would exit was expected. For BT to enter into a JV with M&M made sense almost 20 years back, when such arrangements were required as proof of commitment to offshoring. But things have changed today. Also, since then BT has started working with other IT players and more importantly, its business to Tech Mahindra has come down. Then what’s the point of blocking a cash source in a JV?” said Sudin Apte, principal analyst and CEO of Offshore Insights. Tech Mahindra gets committed business of over $1 billion from BT.
BT's contribution to Tech Mahindra's overall revenue has been declining — it fell to 35 per cent in the July-September period from 45 per cent in the previous quarter and 50 per cent a year earlier.
The fact that investment in Tech Mahindra is not core to BT is known and also that BT has operational pressures. The firm’s revenue in first quarter results, ended June 30, 2010, was down 4 per cent.
Many also believe that the merger between Mahindra Satyam and TechM would further bring down BT’s stake in the merged entity. “There are two issues. Post the merger, BT’s stake will come down. Depending on the swap ratio, it could go down to 10-12 per cent. Also it will no longer be a leading client for the merged entity. Revenue contribution could go down to 20 per cent from the current 45-50 per cent range,” said an analyst on condition of anonymity.
From an M&M point of view, by taking its stake to 48.3 per cent it has made sure that its stake in the merged entity continues to remain in the range of 45-46 per cent. At present the SPV, Venturbay Consultants, holds 43 per cent stake in Mahindra Satyam.
The announcement also said if BT’s stake in Tech Mahindra fell below 10 per cent, a shareholder's agreement between the two companies would terminate.
According to Citigroup Global Markets, today’s stake sale is a small but helpful contribution to BT’s rapid deleveraging, which in time is expected to lead to an improved credit rating and faster rise in the dividend. Citigroup estimates the residual position of BT in the joint venture to be £271 million.
