iGate Corp, backed by private-equity firm Apax Partners, will pay $1.22 billion for India’s Patni Computer Systems in India’s largest private equity-backed buyout to date.
iGate, which is an information technology (IT) firm headquartered in California, earlier this week agreed to pay Rs503.50 ($11.08) per share for a 63% stake in Patni, a total outlay of $921 million. iGate will also make a tender offer to minority shareholders for another 20% of the company at the same price. If accepted in full, the tender will cost $301 million.
For iGate to put together a successful bid it was necessary to concurrently strike an agreement with Apax with regard to an investment by the private equity firm into iGate, which added complexity and time pressure, said a source. Apax is focusing on technology and telecom as one of five target sectors.
Advised by Standard Chartered, the private equity firm has invested in optionally convertible preferred shares in iGate with a total value of $270 million. The shares carry a preferred dividend rate of 8%, compounded quarterly, and will convert at $20.30 per share. The conversion can be triggered at the option of iGate after 18 months if iGate's share price exceeds 205% of the conversion price, and at the option of Apax at any time up to six years from the date of issue. iGate has not disclosed what stake Apax will own upon conversion but a source close to the deal termed it a "significant minority". Apax will have one board seat. iGate currently trades at between $15 and $16 on Nasdaq, though it touched a high of $25 and a low of $9 during the past 52 weeks.
Jefferies and Company is advising iGate. iGate is also raising $750 million of debt from Jefferies Finance and the Royal Bank of Canada (RBC). Of the $750 million, $50 million is a revolving credit facility to be used for general corporate purposes. The balance of $700 million is bridging finance, which will be used to fund the acquisition. The bridging finance will subsequently be taken out by a bond issue, which will also be led by Jefferies and RBC. iGate has opted for a bond as it will be covenant-lite and have a back-ended repayment schedule -- features which appeal to the company as it will be focused on integrating Patni for the foreseeable future, said a source. The debt financing is being raised at an Ebitda multiple of 3.5 times.
Patni's share price closed at Rs460 on the Bombay Stock Exchange last Friday, thus the deal has been struck at a premium just below 10% to the last traded share price before the purchase agreement was signed on January 10.
Patni is a Mumbai-based IT company with 16,000 employees spread across 30 offices in Asia, Europe and the Americas. It was founded by Narendra Patni, who is currently chairman of the board, and his brothers, Gajendra and Ashok, who are both non-executive directors. The three brothers are selling a 46% stake in Patni. The balance 17% is owned by private equity firm, General Atlantic Partners, which made an investment in Patni in 2002.
Whispers about a sale of a substantial stake in Patni have been in the market since 2007. Gajendra and Ashok Patni were both seeking to sell their shares and the deal that was initially shown to private equity firms was a buyout of the two brothers' stakes. Subsequently, General Atlantic also started looking for an exit and finally Narendra Patni threw his hat in the ring. The sellers were advised by Ambit Capital, Avendus Capital and Credit Suisse.
The sale was carried out through an auction, which attracted interest from a number of private equity firms. TPG (Texas Pacific Group) and Advent International looked at the asset before deciding not to bid. Carlyle was in the fray until December 24 when iGate was granted exclusivity.
“During the bidding there was competitive tension not only on price but also on key commercial terms,” said a source.
The price of $1.22 billion values Patni at an Ebitda multiple of around 6.5 times. Some analysts commented after the deal was announced that the price seems aggressive. But Topsy Mathew, managing director of M&A at Standard Chartered, disagreed. "iGate has a very good management team that is under-leveraged -- the combination of iGate and Patni will give iGate a larger scale in one shot," he said.
