L&T set to buy 20.4% in Mindtree, make open offer for another 31%

Mumbai: Larsen and Toubro Ltd. (L&T) is likely to buy the 20.4% stake held by Café Coffee Day (CCD) founder V.G. Siddhartha along with his two Café Coffee Day affiliate firms in Mindtree Ltd, followed by an open offer to buy an additional 31% stake in the company as early as Monday evening, according to people familiar with the development.

L&T has agreed to pay «¤??981 per share to buy the entire stake held by Siddhartha and two of his CCD firms, thereby valuing Mindtree at «¤??16,250 crore, a person directly aware of the development said.

“L&T will buy the 20.4% stake and will announce an open offer to buy up to 51% in Mindtree on Monday evening," said the first executive, on the condition of anonymity.

Typically, an acquirer company is required to make an open offer to gain control of a listed firm only after acquiring 25% in the latter. However, in this case, L&T is set to use a section of the takeover code stipulated by the Securities and Exchange Board of India (Sebi), rarely employed to take over a listed firm, thereby making it the first hostile takeover ever in the information technology (IT) outsourcing space.

“Using section 3, clause 1 of the takeover code, along with section 4 of the code, L&T is entitled to announce an open offer to acquire control of Mindtree," said the executive cited above.

According to Sebi’s takeover rules, an acquirer can launch an open offer to gain control of a listed firm only it makes a public announcement to acquire more than 25% stake and voting rights in the listed firm eventually.

This section of the takeover law is rarely used. Typically, an acquirer first buys 25% in the listed company to trigger a mandatory open offer to take control of a listed firm.

KPMG’s corporate finance team is handling the mandate for the entire deal and Axis Capital and Citigroup Global Markets are running the mandate for the open offer as bankers.

Late on Sunday night, Mindtree co-founder and board member Subroto Bagchi said he had quit as chairman of the Odisha Skill Development Agency to help Mindtree steer through the current takeover threat. "An imminent threat of hostile takeover of Mindtree has made me to resign from the Government to be able to go, save the company. I must protect the Tree from people who have arrived with bulldozers & saw chains to cut it down so that in its place, they can build a shopping mall," Bagchi tweeted.

L&T’s decision to take over Mindtree comes close on the heels of the Mindtree board's announcement that it will meet on 20 March to consider a proposal to buy back its fully paid-up equity shares from the market to fend off a hostile takeover.

According to current norms, the promoters can buy back 10% of the company’s (Mindtree) reserves for a buyback.

Mindtree has around «¤??2,800 crore in reserves, implying the company can use around «¤??280 crore for the buyback of the company’s shares and then use a further «¤??700 crore from the reserves for another 25% stake to retain control. But, if another entity makes an offer, the promoters cannot even use 10% of the reserves for the buyback to regain control.

They need to find an investor offering a higher price to counter the offer and in this case there is no one offering a price higher than L&T. "So the promoters do not have any option but to leave it to shareholders to decide on change of control," said the executive quoted above. L&T could be a better controller of Mindtree than the existing promoters in terms of corporate governance since L&T is not driven by a single founder-promoter group unlike Mindtree, he added.

On Saturday, Mint reported that the announcement of a buyback could push the potential buyer to offer a higher price to public shareholders than that offered by Mindtree promoters for the buyback.

“L&T will first buy the 20.4% stake and make an announcement for an open offer to take control of Mindtree eventually, using section 3 and section 4 of Sebi’s takeover rules. Eventually, L&T will have at least 51% in Mindtree. There is no moratorium involved in the deal. It is straight and within takeover norms," said the executive cited above.

Mindtree shares closed at «¤??946 apiece on the BSE on Friday, which means Siddhartha’s stake will cost a buyer at least «¤??3,200 crore.

Also read: L&T Infotech shares already carry scars of meddling with Mindtree

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.