Mahindra & Mahindra Ltd (M&M) has acquired 5.5% stake in its joint venture IT services firm Tech Mahindra from partner British Telecommunications plc (BT) for Rs 451 crore ($100 million) completing a transaction it had announced few weeks ago. This gives the automotive and flagship group company of the Mahindras near majority in Tech Mahindra while providing a part exit for BT that had been eyeing exit from the company.
On Tuesday, M&M acquired the stake from BT in a bulk deal on NSE at a price of Rs 653.6 per share, a 1% premium to closing price of Tech Mahindra in the stock exchange on Monday. The Tech Mahindra scrip rose almost 4% to close at Rs 673.9 on Tuesday.
BT had 30% stake as of September 30 and sale of 5.5% brings it down to 24.5%, diluting its veto power on board decisions. While giving M&M near majority control, it ensures a prospective acquirer of BT’s remaining stake will not create trouble for the promoter in the future.
Various newsreports had earlier speculated about BT in negotiations with private equity firms such as Providence, Apax and Goldman Sachs for a potential deal.
Given the structure of the transaction, it could well indicate BT could sell the remaining stake to one or more PE firms as M&M does not appear too keen to spending big money to get access to additional stake in the company.
The entire block of 30% stake held by BT is worth Rs 2,338 crore ($ 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.
Earlier M&M had disclosed that 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.
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.