AT&T sells remaining 7% stake in Tech Mahindra

AT&T yesterday sold its entire remaining stake in Indian IT services provider Tech Mahindra through a block trade, realising approximately Rs6.6 billion ($147 million). The sale, which was completed before the Indian market opened, came just over a month after the US telecom operator acquired an 8.07% stake in Tech Mahindra through the exercise of a number of options that it obtained through an agreement with the Indian company in 2005.

The quick divestment prompted some concern among industry analysts that AT&T may also reduce the amount of outsourcing business that it sends Tech Mahindra's way. AT&T is the company's second largest customer, accounting for about 20% of the total revenue, after its co-founder British Telecommunications which still owns 30.8% of the company.

One indication of these concerns was the 4.2% drop in Tech Mahindra's share price yesterday after the sell-down was announced, although investors also likely reacted to the fact that the shares were sold at a discount.

However, in a press release issued late last night, AT&T said it intends to maintain its vendor relationship with Tech Mahindra.

 "Our relationship with Tech Mahindra offers strategic advantages to AT&T, and we plan to continue to work with Tech Mahindra to meet AT&T's information technology needs," the statement quoted the company's chief information officer, Thaddeus Arroyo, as saying.

AT&T bought a total of 9.87 million shares when it exercised the options, according to a filing with the Bombay Stock Exchange on March 23. Over the past couple of weeks it has sold a smaller portion of those shares, corresponding to about 1.1% of the company, on the open market, leaving 7% to be offered through yesterday's block trade. Together these transactions have netted the company about $170 million, a source said.

One purpose of the earlier market sales was to try and determine who might be interested in buying Tech Mahindra shares in bulk and could act as an anchor for the subsequent block trade. And Citi, which was the sole bookrunner for the block as well as an adviser to AT&T with regard to the disposal, did find one such investor. The anchor wasn't disclosed, but the usually well-informed Indian media reported that the anchor was the country's largest insurer, Life Insurance Corp, which already owned a combined 5.1% of the company, based on shareholding data at the end of March.

One source said the anchor, described as a domestic investor, took up "more than half" of the block and added that the transaction was built around this one account. The rest of the shares were bought by a relatively small number of other institutional investors, predominantly from India. Most of the buyers were already Tech Mahindra shareholders. According to various media reports, however, LIC may have bought as much as 88% of the deal.

Yesterday's sale comprised approximately 8.6 million shares, or close to seven days' worth of trading volume. They were offered at a fixed price of Rs762 apiece, which equalled a 5.2% discount versus Tuesday's close of Rs803.90 on the National Stock Exchange of India.

It is questionable whether the company would have been able to clear a transaction at that same discount without the anchor investor, and as such the divestment strategy appears to have been successful. One banker said that in the current market it is almost standard advice to have sellers test the market with a smaller number of shares before they launch a block trade through the capital markets to try and draw out the serious buyers.

While there was no information about why AT&T decided to sell so quickly, one source said the supply side challenges faced by the IT players coupled with the appreciation of the rupee versus the US dollar both played a role. According to the prospectus Tech Mahindra issued before its listing in 2006, AT&T had until April 30 to exercise the options and given how long it had been sitting on them, it is reasonable to expect that it made a decent profit. The exercise price hasn't been disclosed, but Indian media has reported that it paid about $34.5 million for the stake when it exercised the options, suggesting the gross profit may have amounted to as much as $135 million.

The options were received as an incentive for AT&T (initially its predecessor SBC Services) to increase its business with Tech Mahindra and could be exercised when the revenue contribution from AT&T reached a certain target level.

Tech Mahindra was founded as a 50-50 joint venture between Indian tractor and utility vehicle manufacturer Mahindra & Mahindra and British Telecommunications in 1986, and focuses primarily on providing services to the telecom industry. Last year, however, it expanded its business scope by buying a controlling stake in Satyam Computer Services. Satyam was sold through a government-induced auction after it emerged that long-term accounting fraud had left the company's balance sheet with a hole of more than $1 billion, while revenues and profits had been over-stated for several years.

Tech Mahindra's share price has fallen 22% this year and is down 60% from its record highs in January 2007. However, its current share price of Rs770 is still more than double the August 2006 IPO price of Rs315.