Blackstone to hold on to Mphasis stake
MUMBAI: Global private equity (PE) major Blackstone on Monday said it will transfer its entire majority shareholding in Mphasis Ltd from its existing fund to two new funds, after dropping plans to sell its stake to a third party. The move will help Blackstone, which owns 56% in the IT services company, hold on to the stake for a longer period, and seek exit opportunities at a later time.
The PE firm said its 104.79 million shares in Mphasis, held by Blackstone Capital Partners VI fund (BCP VI), will be bought by Blackstone Capital Partners VIII and Blackstone Capital Partners Asia funds (BCP VIII and BCP Asia). This transaction will be done at a maximum value of ₹15,216 crore, Blackstone said in a notice to stock exchanges.
It is not uncommon in the private equity world for firms to transfer their shareholding from one fund of theirs to another.
PE funds have a limited lifespan, and the capital must be returned to investors before it ends. If an older fund holding an investment is unable to find a buyer for its investment, due to current macro conditions or if it is not getting the right value for it, the PE firm may look to sell the investment to another of its funds. This gives liquidity to the existing investors of the old fund, and the PE fund can then continue to hold on to the investment till it is able to find buyers at a price which is profitable.
Such a transaction can also be executed when a PE firm sees a long growth runway for its investment and does not want to lose out on the growth prospects due to its fund reaching its lifetime. In such a situation, transferring to a new fund gives the PE firm the headroom needed to exploit the full growth potential of its investment.
“Blackstone believes that Mphasis can grow from over $4 billion in market cap today to almost $10 billion. And while there was increased interest from buyers post Covid-19 to acquire the company, the firm has decided to continue to hold on to the investment given the growth that it expects. It is not just a transfer from one Blackstone fund to another, since there are new investors who are acquiring the company along with Blackstone and have done their own independent assessment of the value and the growth potential of the company,” said a person aware of the PE firm’s plans, speaking on the condition of anonymity. This is the largest ever PE deal in India, he added.
Since the sale involves a transfer of more than 25% stake, it triggers an open offer under regulatory norms, which will see the two acquiring Blackstone funds make an offer to public shareholders to purchase up to 26% shareholding of the firm.
The open offer price has been set at ₹1,677.16 per share. On Monday, Mphasis shares closed trading at ₹1,722.95, up 1.49% on the BSE. If Blackstone acquires the entire 26% through the open offer, it will have to shell out ₹8,262 crore. This will take the maximum purchase price for Blackstone to over ₹23,000 crore for both the transactions.
To be sure, the final purchase price will be lower than ₹23,000 crore, since Blackstone will acquire shares only up to 75%, depending on the number of shares it acquires in the open offer. If the open offer is subscribed fully, then Blackstone will reduce the purchase of shares from BCP VI (55.31%) so that its total shareholding does not cross 75%.
“Based on the open offer subscription, the blended purchase price will vary between ₹1,452 to ₹1,497 per share (12-16% premium to 12-month average price and 3-6% discount to 6-month average price) and the purchase consideration will vary between ₹15,200 crore to ₹21,000 crore (or, approximately $2.0 billion to $2.8 billion),” Blackstone said in a statement.
A wholly owned subsidiary of the Abu Dhabi Investment Authority (ADIA), UC Investments and other long-term investors will co-invest along with Blackstone, it added.
“Mphasis is backed by strong secular tailwinds as global enterprises increasingly migrate to the cloud. It is exceptionally well-positioned given a terrific management team, strong order backlog, long-term strategic customer base, deep domain expertise in financial services, and a world-class suite of cloud and digital offerings. This investment enables us to continue creating value for the long term with continuity in the management team and the board, and provide additional resources to further accelerate the firm’s growth momentum,” said Amit Dixit, co-head of Asia acquisitions and head of India for Blackstone Private Equity, in the statement.