As reports surface of VG Siddhartha’s likely plan to sell the entire Coffee Day stake in Mindtree, here’s a look at what a potential stake sale means for all parties involved
IT firm Mindtree has been making headlines lately as L&T Infotech and private equity firm KKR are reportedly gearing up to contest for a stake held by Coffee Day Enterprises and its owner VG Siddhartha in the software company.
Since its founding in 1999, Mindtree has created an envious business with fairly stable growth. Suitors see a stake sale in Mindtree by one of the company's large non-promoter shareholders -- VG Siddhartha, who along with his group companies owns about 21 percent in the software company, as an attractive opportunity.
Over the last 10 years, Mindtree's shares have appreciated 15 times or at a compounded annual growth rate (CAGR) of 33 percent. This is one of the reasons why the potential could even look at a complete buyout via an open offer, even as founders of the mid-sized company are reluctant to sell.
Moneycontrol independently could not verify the report.
Considering Mindtree has built itself a good portfolio over the two decades, here's what it has to offer its stakeholders who either want a bite of its shares or make good returns on the shares they hold:
> VG Siddhartha
Media reports suggest Siddhartha is looking to exit Mindtree to steer through financial challenges in his company, Coffee Day Enterprises, that operates the Café Coffee Day (CCD) chain. The stake sale is expected to help CCD pay off Rs 5,000 crore in debt and deleverage the balance sheet.
Siddhartha directly holds 3.33 percent stake in Mindtree, 10.63 percent through Coffee Day Enterprises and 6.45 percent through Coffee Day Trading, taking his total ownership to 20.41 percent. Coffee Day Trading is a subsidiary of Coffee Day Enterprises established in 2000 to provide companies with access to capital.
According to media reports, LTI has offered Rs 1,150-1,200 per share for the 20.41 percent stake, while KKR is open to shelling out Rs 1,500-2,000 crore for the stake through a combination of debt and equity. The share closed at Rs 902.10 on January 29 at a market value of Rs 14,779.26 crore.
A rough estimate suggests Siddhartha will bag Rs 3,000 crore if he sells the entire 3.3 crore shares at the last closing price of Rs 902.10 per share on January 29.
Siddhartha, who joined the board when he first invested in Mindtree in 1999, stepped down as an independent director in March 2018. The development triggered speculations that he may cash out on his investments and deploy the funds to scale up CCD's operations.
> L&T Infotech
With 50 percent of Mindtree's revenue accruing from digital, it becomes an attractive acquisition for LTI as it fits well within the transformed LTI which has digital technology at its core under the new leadership.
LTI's earnings indicate a strong growth with sharp improvement in operating margin and a strong deal pipeline. Mindtree's addition to its portfolio will allow LTI to expand further and deploy excess cash and get access to technical capabilities and/or markets.
Market analysts suggest LTI has a strong management that can add value to Mindtree and the latter's shareholders can look forward to benefits from synergies after the initial integration pangs. Moreover, the coming together of two successful mid-tier IT names will lead to a more efficient larger-sized IT company that can better navigate the challenges and grab opportunities thrown by the changing technological landscape. Thus, the regulator might insist on an open offer to minority shareholders.
However, the Mindtree promoters are worried about a hostile takeover in the process. Mindtree may lose its control over management and policies, Shailendra Kumar, Director at Narnolia Financial Advisors told Moneycontrol. For instance, if LTI acquires Siddhartha's stakes in Mindtree, there may be some change in management. In this case, the regulator may also insist on an open offer to minority shareholders.
KKR is said to be in discussions with a homegrown technology-focused investment bank to finalise a deal with Siddhartha with the backing of the incumbent management and founders.
Owing to the promoters' concern over a change in management due to a hostile takeover, the Mindtree management has reportedly reached out to several potential investors and family offices to come on board as a white knight.
There are other reasons also for the promoters to feel uncomfortable. Market analysts suggest a white knight to help the founders is unlikely to pay top dollar for the stake. These investors typically like to monetise their investment within a relatively shorter time frame. To that extent, the near-term stock upside is limited and the question of an open offer doesn't arise. But long-term investors should read this as a strong sign of confidence about the company's future from the founders, who know the company best.
Siddhartha's move to sell his and associates' stakes in Mindtree may impact other promoters of the company, who own about 13 percent stake. Until now, Siddhartha backed Mindtree founders and promoters enabling them to take management decisions and formulate policies independently without interference from other stakeholders.Read: I-T Dept restricts Mindtree from selling V G Siddhartha, Coffee Day Enterprises’ shares
Losing Siddhartha's 21 percent stake to someone hostile may result in the promoters losing their control over management, which may impact the company's growth strategy for the future.
The four remaining founders -- Subroto Bagchi, NS Parthasarathy, Krishnakumar Natarajan and Rostow Ravanan -- have been holding out against a sale, according to a report by The Economic Times. The founders and promoters are now looking at options available to retain management control and gain support from other influential investors such as Baburaj Pillai, Pulak Prasad, and Akash Prakash, who own about 15 percent stake in Mindtree through their associates.
Hurdles for Siddhartha
Even though VG Siddhartha is all set to cash out from Mindtree, there is a hurdle. Two days after the report of Siddhartha's stake sale surfaced, the Income Tax (I-T) Department attached 4.5 percent shares held by Coffee Day Enterprises and VG Siddhartha in Mindtree for a period of six months over a potential tax demand.According to the company, 74.90 lakh shares of Mindtree have been affected by the provisional attachment by the Income Tax Department, in which 22.20 lakh shares are held by Coffee Day Enterprises in Mindtree and 52.70 lakh shares by its promoter Siddhartha.
In response to the attachment, Coffee Day Enterprises said in a regulatory filing it has already discharged its tax liability along with the revised returns. "…there is no tax liability payable by the company and its subsidiaries as per the revised returns filed," Coffee Day Enterprises said on January 26.
Coffee Day has requested the I-T Department to attach the company's shares worth Rs 150 crore instead of its holding in Mindtree that had been attached earlier, according to a report by CNBC-TV18.While VG Siddhartha is said to move the Central Board of Taxes (CBDT) to
release his shares that have been attached, he may not be able to touch these shares until the I-T Department gives him and his company (Coffee Day Enterprises) a clean chit.In 2017, the I-T Department had conducted raids at premises of Cafe Coffee Day and its group companies across 25 locations in Bengaluru, Chikmaglur, Mumbai and Chennai, including the residence of Chairman and Managing Director V G Siddhartha. At that time, the I-T Department had detected undisclosed income worth over Rs 650 crore linked to the Cafe Coffee Day group.
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