Tech Mahindra and Mahindra Satyam have been approved for merger at a swap ratio of 2:17. The Mahindra group will own 26.3% in the combined entity, British Telecom will have 12.8%, 10.4% will be held as treasury stock, 34.4% will be held by public shareholders of Mahindra Satyam and the balance 16.1% will be held by the public shareholders of Tech Mahindra, which will issue 103.4 million new shares, thereby increasing its outstanding shares to 230.8 million and its equity capital to R2,308 million. The completion of the merger process remains six to nine months away.
The combined entity will have approximately 75,000+ strong work force and 350+ active clients across 54 countries. Our estimates suggest combined revenue of $2.47 billion in FY12 and $2.63 billion in FY13.
The joint entity will have a unified go-to-market strategy and a more diversified revenue footprint geographically. The combination will benefit from operational synergies, economies of scale, sourcing benefits and standardisation of business processes.
Revenues of the merged entity will have about 53% contribution from telecom and retail verticals, followed by 17% from manufacturing, while BFSI, technology, media & entertainment will constitute about 10% each.
Our estimate is an EPS of R70.1 in FY12 and R66.1 in FY13 (excluding the restructuring fees). The merger has created 24 million treasury shares, which will serve the purpose of ready liquidity in case of an investment opportunity.
The combined entity trades at 10.3x FY13E earnings. Even if we value Satyam at 12x and Tech Mahindra at 9x FY13E PAT, our resulting target price of R734 implies 7% upside. We are neutral on the stock.