L&T, Mahindra, Spice in race for Satyam

Written by Corporate Bureau | Updated: Mar 13 2009, 05:33am hrs
Satyam
Larsen & Toubro (L&T), Tech Mahindra and the Spice group on Thursday submitted expressions of interest (EoI) to participate in the bidding process to acquire a 51% stake in Satyam Computer Services. Another major contender, the Hinduja group, backed out from the bidding process for reasons it did not disclose. Capgemini, Europes largest computer consultancy, also said it has no interest in buying a stake in the troubled IT company. The deadline for submitting an EoI ended at 5 pm on Thursday.

Satyams government-appointed board is keen to bring in a majority investor to restore the confidence in the company of its 50,000-strong staff and more than 600 customers, which include General Electric and Qantas Airways. Though the company was hit by Indias biggest corporate scandal, its top clientele and staff talent are seen as attractive to potential bidders. However, the class action suits in the US still hang like a Damocles sword over the company, with estimated liabilities of $400 to $800 million, according to Spice group legal advisors.

The Satyam board is meeting on Friday in Hyderabad to scrutinise the EoIs.

Engineering and construction major L&T, seen as a frontrunner, has a 12% stake in Satyam. It had bought 4% stake in Satyam as a strategic investment before the IT firms chairman Ramalinga Raju confessed to a Rs 7,000-crore fraud. When Satyam shares tanked on news of the fraud, the L&T management came under severe criticism for the mark-to-market losses of up to Rs 450 crore on the share purchase. The company then publicly expressed its intention to buy Satyam, and subsequently scaled up its stake to 12%. We have already put in our expression of interest, said the L&T spokesperson, when contacted by FE.

Although L&T has an IT services subsidiary and is keen to acquire Satyam for a larger IT play, the lions share of its Rs 35,000-crore turnover (FY 2008) comes from its engineering and services business. It launched the IT business primarily to stem the attrition of talent from the engineering business to other IT companies, according to its chairman and managing director AM Naik. L&T Infotech is not listed, but Naik, had in an interview with FE earlier said Infotech figures in the Nasscom top 10 list and would have revenues of close to Rs 2,500 crore in FY 2009. He had said the company was targeting a profit of Rs 300 crore in FY 09. Though L&T is a respected company with sound financials, the disadvantage is that its IT business has never been in the limelight compared to the other bidder, Tech Mahindra.

Tech Mahindra, which was earlier called Mahindra British Telecom, was formed in 1986 and has been providing services and solutions primarily to the telecom sector. In 2006, it was renamed and listed on the Bombay Stock Exchange. Part of the over Rs 30,000-crore Mahindra group, Tech Mahindra had revenues of Rs 1,132.2 crore in Q3, with a net profit of Rs 223 crore.

The company, over-dependent on revenues from British Telecom, has of late been scouting for big businesses outside BT. In line with the process set out by the Satyam board, Tech Mahindra said it has registered its interest in taking part in the bidding process. However, earlier in the week, when the announcement for submission of EoI was made, the company said that it would put in an EoI only after getting a clearer picture of Satyams financial status. Once we have received the RFP (request for proposal) and other information, we will evaluate and conclude on next steps, said the company in a statement.

BK Modi-led Spice Corporation, with annual revenues of around Rs 20,000 crore, has also said right from the beginning that it is in the race for Satyam. Spice has two BPO arms, Bharat BPO and Omnia, with around 7,000 people, which they plan to scale up to 15,000 in the next two years. The group has formed a seven-member team to take an investment decision on Satyam. The team comprises DR Mehta, former Sebi chairman, KN Memani, former country manager, Ernst & Young, KL Chug, former chairman of ITC group, and four others. We have appointed the US-based law firm Gibson Dunn & Crutcher to assess the liabilities of Satyam, commented BK Modi, chairman, Spice group.

At the same time the Hinduja group,which was widely expected to participate in the bidding process, has backed out. After careful consideration, we have decided not to participate in the bidding process. As the sale has begun, I would not like to give any reason for our decision, commented Prabal Banerjee, group CFO, Hinduja group.

As per the bidding process, each interested bidder would be sent a RFP and asked to submit a detailed EoI together with the proof of availability of at least Rs 1,500 crore funds by March 20, 2009.

Based on the EoIs, eligible bidders will be short-listed and given access to certain business, financial and legal diligence materials relating to the company provided they have executed a non-disclosure and non-solicitation agreement, a stand-still agreement and a no-claims undertaking. After completion of the due diligence process and execution of the pre-financial bid documents, all short-listed bidders will be asked to submit their financial bids and an executed copy of the share subscription agreement.

Upon evaluation of the bids, the company will select the successful bidder, which will have four days to deposit with the company the entire subscription amount and the requisite funds for the a public offer in an escrow account.