MINDTREE SHARE BUYBACK TO MAKE TAKEOVER COSTLY

Mindtree’s plan to buy back shares will make picking stake an expensive proposition for Larsen & Toubro (L&T). L&T is in talks with the single-largest shareholder in Mindtree, V G Siddhartha of Café Coffee Day group, to buy his 20.41 per cent stake in Mindtree. At the current price, the stake would cost L&T around ~3,300 crore.

Mindtree is already trading at two times its enterprise value (EV) to revenues and the buyback at an expected at a price of ~1,000-1,200 would take the share price even higher, according to analysts.

G Chokkalingam, managing director of Equinomics Research and Advisory, said anything beyond the current price will make it an expensive deal for L&T, given there are other IT firms available at 1-1.5 times their EV to revenues.

Once L&T buys Siddhartha’s stake, it could also look at acquiring the 10.61 per cent stake of foreign investor Nalanda (India Fund and India Equity Fund), which will take its stake to over 30 per cent. This could then trigger an open offer, given the threshold for the same is 25 per cent. While the deal is expensive, L&T has set high targets for its IT services businesses — L&T Infotech and L&T Technology Services.

The L&T group plans to break into the top five Indian IT services companies and is expecting 30 per cent of the group’s turnover from IT services, so paying a premium for a controlling stake in Mindtree might not be an issue for them. Given its surplus cash, L&T Infotech had plans for a buyback and had not deployed the same so far. This cash (of over ~2,000 crore) could come handy now.

For the founding promoters of Mindtree, the buyback is an attempt to stall the takeover. Their stake in Mindtree, at 13.3 per cent, is expected to move up if they don’t participate in the buyback as the equity base will shrink.

An IT analyst at a domestic brokerage said: “In terms of service verticals and geographies, Mindtree is similar to L&T Infotech. The same promoter with two businesses, which are competitive to each other, is not a model they would want to follow. They will have to merge L&T Infotech and Mindtree leading to a change in top management at Mindtree.”

For the current management of Mindtree, the private equity players are the only ones who can now queer the pitch for L&T by offering a higher price for a stake in the company. The biggest beneficiaries of the takeover battle between L&T and Mindtree founding promoters could be Siddhartha and the minority shareholders.

Analysts said the stock price will move up over the coming weeks if the battle heats up. They said if the buyback price is upwards of ~1,200, investors should tender their shares, because, at this level, the stock will be priced at 21 times one-year forward earnings, which is its peak valuation as compared to the current levels of 17-18 times.