After being on the block for nearly two years, the founding promoters of IT firm Patni Computer Systems finally agreed to sell their stakes to iGate Corporation in a deal that would create another billion-dollar giant in the Indian IT services industry.
The Phaneesh Murthy-led iGate on Monday announced that it would acquire the 45.6% stake held by the three Patni brothers ? Narendra, Gajendra and Ashok ? as well as the 17.4% stake held by private equity firm General Atlantic for Rs 503.5 per share, or a total consideration of $921 million. Including the mandatory open offer to public shareholders of Patni, the deal totals $1.22 billion, making it one of the largest merger transaction the Indian outsourcing industry has ever seen. iGate is not paying the much-hyped non-compete fee to Patni promoters.
The acquisition would give the much-smaller-in-size iGate unprecedented scale, higher access to global customers, the ability to play in larger deals and take on its SWITCH rivals ? Satyam, Wipro, Infosys, TCS, Cognizant and HCL Technologies ? head on. The iGate-Patni combine has revenues of $941 million as of September 2010 and a headcount of nearly 25,000.
? This is an extremely seminal transaction for us; we hope this will be an industry changing one. There has not been a single deal of this size in what I call a non-cross-border transaction. A billion dollars and 25,000 employees will make us a force to be reckoned with and will put us on the map in a much more dramatic way,? CEO Phaneesh Murthy said during a press conference in Bangalore.
The transaction is expected to be completed in the first half of 2011 and iGate hopes it to be accretive by 2012 on a cash earnings per share basis. Murthy said the firm was financing the expensive deal through a mix of debt, equity financing and cash in hand. Equity financing could include a potential public offering of up to 10 million shares.
iGate has secured debt financing of up to $700 million and an additional $50 million revolving line of credit from Jefferies & Company and the Royal Bank of Canada Capital Markets. The firm is also issuing equity to Apax Partners, which has partnered with iGate in this deal.
In a statement, iGate has said that Viscaria Limited, a company backed by funds advised by Apax Partners, will make an investment into iGate in order to facilitate the acquisition. iGate has agreed to sell to Viscaria $270 million of preferred stock convertible into common stock with a conversion price of $20.30 per share. The preferred stock investment by Viscaria may be increased by up to an additional $210 million based on the subscription in the open offer process.
Murthy said Patni would continue to remain publicly listed beyond the first half of 2011.
?The merger road map is difficult to define. There are several regulatory approvals we have to get. We expect Patni to remain a publicly listed company for quite some time to come,? he said.
Shares of Patni closed at Rs 463.85 on BSE, up 0.82%.
?It is expected that current Patni customers would be cautious and concerned, but it would be unwise to assume that they are ready to switch vendors. There are always risks in any type of buys, and addressing Patni employee attrition risk needs to be the utmost priority,? Erik Aase, principal analyst at Forrester Research said.