MUMBAI (Reuters) – Indian mid-sized IT outsourcer Tech Mahindra (TEML.BO) won an auction to buy Satyam Computer Services Ltd (SATY.BO), the company at the heart of India’s biggest corporate scandal.
Satyam said on Monday Tech Mahindra agreed to buy a 31 percent stake at 58 rupees per share — a 23 percent premium to Satyam’s last closing price. The bid edged out offers from engineering conglomerate Larsen & Toubro (LART.BO), widely seen as a front-runner, and private equity firm WL Ross & Co.
Tech Mahindra, in which Britain’s BT Group (BT.L) holds about 31 percent stake, will pay $351 million for 31 percent preferential allotment of new shares.
Satyam’s sale is likely to help restore confidence in India’s IT services sector at a time the global economic downturn has already slowed growth.
“Tech Mahindra will really have to act fast now and if they don’t act fast then client erosion will continue at Satyam,” said Tarun Sisodia, head of research at Anand Rathi Financial Services.
Three months ago, Satyam’s founder and chairman shocked investors by saying profits had been overstated for years, and put in doubt the survival of a company once ranked as India’s fourth-largest software services exporter.
The government quickly stepped in and sacked the board to limit damage to India’s once-shining IT services sector.
With the purchase, Tech Mahindra, the sixth-largest Indian outsourcer, will be better equipped to wrestle market share from leading local outsourcing rivals Tata Consultancy Services (TCS.BO), Infosys Technologies (INFY.BO) (INFY.O) and Wipro (WIPR.BO) (WIT.N).
Tech Mahindra, a unit of tractor and utility vehicle maker Mahindra & Mahindra (MAHM.BO), will have to make open offer for a further 20 percent of Satyam at a minimum price of 58 rupees a shares, valuing Satyam at about $1.1 billion on paper.
“If the winning bid had been more than 60 rupees a share then it wouldn’t have made any sense for the buyer. The 58 rupees offer is on fair value side,” Sisodia said.
The Satyam buy will help Tech Mahindra, diversify its services by reducing its reliance on the telecoms industry, analysts said.
Tech Mahindra shares surged by as much as 25 percent after Larsen & Toubro, which owns 12 percent of Satyam, was reported to have dropped out of the bidding, but trimmed gains to trade 15.3 percent higher at 368.95 rupees by 0900 GMT.
Satyam shares rose 5.8 percent to 49.90 rupees, after earlier jumping 16 percent to a nine-week high. The company was valued at roughly $675 million in the market.
UNCERTAINTY OVER VALUATION
Analysts have said Satyam looks attractive due to its long list of marquee clients and after a plunge in its market value caused by the $1 billion-plus fraud.
However, they were unsure how to value the company due to uncertainty about its accounts and legal liabilities arising from lawsuits filed in the United States by its shareholders.
In October, Satyam, which means “truth” in Sanskrit, had said it had around 53,000 employees and more than 600 clients including General Electric (GE.N), Cisco Systems (CSCO.O) and Qantas Airways (QAN.AX).
The holders of Satyam’s American depository shares would be able to participate in the public offer.
Tech Mahindra’s winning bid was more than the 45.90 rupees offered by Larsen & Toubro and 20 rupees a share by WL Ross, Satyam chairman Kiran Karnik told a news conference.
Satyam’s government-appointed board met in Mumbai to go over the bids submitted for a 51 percent stake in the outsourcing company.
The winning bid has to be approved by the Company Law Board, which said it expected Satyam to seek approval within 2-3 days.
The vast majority of customers of fraud-hit Satyam have stayed on through the process of a stake sale in the company, Karnik said.
Satyam has not reported results since releasing July-September figures in October. Its accounts are in the process of being restated.
Satyam’s board had appointed two investment banks, Goldman Sachs and Avendus Capital, to find a strategic investor. Click here for a timeline.
By Janaki Krishnan and Saikat Chatterjee
(Additional reporting by Prashant Mehra & Narayanan Somasundaram and Devidutta Tripaty; Writing by Sumeet Chatterjee; Editing by Anshuman Daga)