Mahindra & Mahindra Ltd (M&M) will acquire 5.5% stake in its joint venture IT services firm Tech Mahindra from partner British Telecommunications plc (BT) for an undisclosed amount, it said on Friday. This will give the automotive and flagship group company of the Mahindras near majority in Tech Mahindra while providing a part exit for BT that had been eyeing exit from the company.

Various newsreports had speculated about BT in negotiations with private equity firms such as Providence, Apax and Goldman Sachs for a potential deal.

BT had 30% stake as of September 30 and sale of 5.5% will bring it down to 24.5%, diluting its veto power on board decisions. While giving M&M near majority control, it will ensure a prospective acquirer of BT’s remaining stake will not create trouble for the promoter in the future.

Given the structure of the transaction, it could well indicate BT could sell the remaining stake to one or more PE firms as M&M does not appear too keen to spending big money to get access to additional stake in the company.

A 5.5% stake at the current market price will translate into a deal worth Rs 428 crore or a lad less than $100 million. The entire block of 30% stake held by BT is worth Rs 2,338 crore(~$ 523 million). Some media reports suggested that BT is looking at a substantial premium to the market price for the stake sale. This could be another reason why M&M is not too keen on exercising its right to buyout whole of BT’s stake.

Indeed, the stock market disclosure states it is proposed, “To grant BT a waiver of M&M's pre-emption rights under the Shareholders' Agreement between M&M, Tech Mahindra and BT for the balance of BT's shareholding in Tech Mahindra which M&M has not agreed to acquire, subject to certain conditions.”

The deal also includes a provision that when BT’s stake in Tech Mahindra falls below 10%, the Shareholders' Agreement between M&M, Tech Mahindra and BT will automatically terminate.

Meanwhile, reports had suggested any deal for BT’s stake in Tech Mahindra will also be linked to its stake in Satyam Computer Services that has been rechristened as Mahindra Satyam. There are differing opinion on whether value of BT’s stake would be higher if it sells now or waits for a merger of Tech Mahindra and Mahindra Satyam.

This is not the first time BT is looking to press the exit button from Tech Mahindra. It had to defer its plans two years ago due to the effect of the global markets crash.

Early this year, American telecom giant AT&T had generated cool return on its investment in Tech Mahindra by selling all of its 8% stake in the firm. AT&T had picked the shares for around Rs 160 crore as per an option granted over five years ago or before the IPO of Tech Mahindra.

The shares were owned by an investment entity which was a promoter group firm till December and came to be owned by AT&T in March this year when the US firm exercised its option. The option to buy the stake was contingent to Tech Mahindra achieving certain targeted revenues from IT contracts from AT&T.

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