Apax Partners’ iGate To Buy Majority Stake Of Patni From General Atlantic & Others For $1.2B

iGate, a software firm backed by Apax Partners, agreed to acquire a majority stake in India’s Patni Computer Systems for $1.2 billion, Reuters reported. iGate agreed to pay 503.50 rupees a share for a 63 percent stake in Patni from founder General Atlantic LLC. This values the transaction at $921 million. iGate plans to acquire another 20.6 percent stake from minority shareholders for $301 million. The deal is expected to close during the first half of 2011.

(Reuters) – Software firm iGate (IGTE.O: Quote, Profile, Research, Stock Buzz) is buying a majority stake in India’s Patni Computer Systems (PTNI.BO: Quote, Profile, Research, Stock Buzz) for $1.2 billion, helping it to take on bigger rivals in the country’s export-driven IT services industry.

U.S.-listed iGate, backed by private equity firm Apax Partners, said it agreed to pay 503.50 rupees a share for a 63 percent stake in Patni, valuing the deal at $921 million. It will buy an additional 20.6 percent stake through an open offer to Patni minority shareholders for $301 million.

Small-and mid-cap IT services firms have been grappling with tepid demand and high attrition rates due to tough competition from larger rivals, and a rise in costs expenses in India’s $60 billion software services sector.

Combining operations would allow mid-sized companies such as iGate and Patni take on bigger rivals such as Infosys Technologies Ltd (INFY.BO: Quote, Profile, Research, Stock Buzz) and Wipro Ltd (WIPR.BO: Quote, Profile, Research, Stock Buzz) to compete for orders from overseas clients.

“There is scope for consolidation in this sector and it will happen,” said Rakesh Rawal, head of private wealth management at Anand Rathi Financial. “Smaller players will have to get together for value creation,” he said.

The price reflects a premium of 9.4 percent over Patni’s closing price on Friday of 460.10.

The stake is being sold by Patni’s three founding brothers, who collectively own 45.6 percent, and private equity firm General Atlantic, which owns 17.4 percent.

Talks to sell a stake in the software services exporter had been going on for about two years, but Patni never closed a deal due to valuation gaps with buyers, sources had told Reuters.

Phaneesh Murthy, iGate’s Chief Executive and a former sales head at India’s No.2 software exporter Infosys, said the acquisition is likely to close in the first half of this year and it would help boost its revenue, customers and service offerings.

Patni shares ended up 0.8 percent on Monday at 463.85 rupees in the main Mumbai market .BSESN down 1.8 percent. The stock fell 1.7 percent in 2010, compared with a 32 percent jump in the sector index .BSEIT and a more than 17 percent rise in the benchmark index .BSESN.

“It’s not a price one would be gung-ho about, for sure,” said Tejas Doshi, head of research at brokerage Sushil Finance in Mumbai, referring to the winning bid price of 503.50 rupees a share.

“Investors in Patni should have got a much better price. But from iGate’s perspective, its an asset worth buying at this price,” he said.

The iGate-Patni deal is the second-largest in then high technology sector in terms of deal value, after Oracle Corp’s acquisition of majority stake in India’s i-flex solutions for more than $1.5 billion, according to Thomson Reuters data.

FINANCING THE DEAL

The last big deal in the Indian IT sector took place in April 2009, when Tech Mahindra (TEML.BO: Quote, Profile, Research, Stock Buzz), a unit of tractor and utility vehicle maker Mahindra & Mahindra (MAHM.BO: Quote, Profile, Research, Stock Buzz), agreed to buy Satyam Computer (SATY.BO: Quote, Profile, Research, Stock Buzz) at a premium of 23 percent.

Apax will bring in up to $480 million for the acquisition of Patni’s majority stake, and iGate will raise debt of up to $750 million from Jefferies & Company and RBC Capital Markets, Murthy told a news conference.

Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz) and Jefferies & Company advised the iGate-Apax consortium on the deal. Credit Suisse (CS.N: Quote, Profile, Research, Stock Buzz) and Ambit Capital represented Patni and General Atlantic.

Patni, also listed in New York (PTI.N: Quote, Profile, Research, Stock Buzz), is one of the pioneers in India’s software sector and provides technology outsourcing services to industries such as insurance, telecoms, utilities and retail.

Its clients include General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz), Hitachi (6501.T: Quote, Profile, Research, Stock Buzz) and Procter & Gamble Co’s (PG.N: Quote, Profile, Research, Stock Buzz) Gillette brand.

“We don’t see any overlap in clients, in fact we see synergy. The overall portfolio is extremely complementary. That is what we want to focus on,” Patni Chief Executive Jeya Kumar told reporters on a conference call.

When asked if he wants to keep the two public listings following the deal, Murthy said it was unlikely. “All options are very much on the table. I think the fact (is) we would prefer to be listed primarily on the U.S. exchange.”

Patni has more than 16,000 staff, 282 clients and revenue of $689 million for the 12-month ended Sept 30, 2010. iGate, with 8,278 employees and 82 customers, had $252 million in revenue at the end of the 12-month period on Sept, 2010.

By Sumeet Chatterjee and Bharghavi Nagaraju
(Additional reporting by Prashant Mehra, Manasi Phadke and Tanmaya Nanda in MUMBAI; Editing by Jui Chakravorty and Louise Heavens)