Overview:
On March 18, 2019, Larsen & Toubro (L&T), a large Indian conglomerate with interests in technology, engineering, construction, manufacturing, and financial services industries, announced that it is acquiring 20.32% stake in Mindtree for c.$470m. The stake was held by the retail chain Coffee Day Enterprises and its owner VG Siddhartha, long-term investors and highest shareholders in the company. According to reports, VG Siddhartha waned to sell the stake in Mindtree since quite some time, primarily to reduce the debt in Coffee Day Enterprises. L&T has also placed a market order to purchase up to 15% shares, and launched an open offer to acquire 31% additional stake in Mindtree at INR 980 per share, a move that will make it a majority shareholder if successful.
More than its terms, the transaction has been in the news because it has been opposed by the founders of Mindtree, led by N Krishnakumar, Subroto Bagchi, NS Parthasarthy, and Rostow Ravanan, who collectively hold 13.32% in the company. L&T, has said that it has no plans to integrate Mindtree with its other technology company (L&T Infotech), and that Mindtree will continue to run and grow as an independent entity.
Valuation:
The transaction values Mindtree at $2.2bn – representing EV / Revenue multiple of 2.3x and EV / EBITDA multiple of 15.0x. This is at par with the valuation of Large Indian IT services companies, which are trading at c.2.5x revenue multiple and c.14.0x EBITDA multiple. The per share price of INR 980 represents a premium of 1.8% over the company’s closing share price on the day transaction was announced.
The valuation, is at a discount to other large transaction that were announced recently – DXC Technology’s acquisition of Luxoft. Luxoft, which is similar size as of Mindtree, commanded a valuation of 2.2x revenues and 20.6x EBITDA. This is possibly because of the minority stake purchase.
Transaction rationale:
The transaction is in line with L&T’s value creation strategy, which includes ‘Growing services business’ as one of its pillars. The group’s services business consists of technology services (L&T Infotech, L&T Technology Services), and financial services (L&T Financial Services).
It augments the presence of L&T’s technology services business in Hi-Tech, CPG, Retail and Travel verticals. Also, according to the group, there is limited client overlap between Mindtree and its other technology businesses – providing it an opportunity to cross-sell its services. Also, this will greatly increase the group’s digital transformation capabilities, specifically in the IMS and cloud technologies such as Azure, Salesforce, and SAP.
L&T believes that there is significant upside potential to Mindtree and the group would bring in client connects and the experience that will help Mindtree achieve its potential. However, its ability to unlock that potential might depend on whether it is able to capture the majority shareholding, which will allow it to influence decisions at a board level.