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Mindtree founders eye white knight to check takeover bid

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The founders of Bengaluru-based IT services company Mindtree are looking to shore up their control of the company against a possibly hostile takeover, with 21% stakeholder VG Siddhartha’s exit imminent, said people aware of the matter. They have initiated an outreach exercise with private equity investors, family offices, institutional and HNI (high net worth individual) shareholders in the company to prop up a friendly ‘white knight’ as a counter to efforts by LT Infotech (LTI) to acquire the Café Coffee Day founder’s holding, the people said.

The founders led by chairman Krishnakumar Natarajan have been holding meetings in Bengaluru and Mumbai to drum up support, they added. “Natarajan is in Mumbai trying to figure out a win-win for all stakeholders.

They are holding out against the entry of a peer like LT Infotech since they fear in the process they would get marginalised,” said one of the persons.

CEO Rostow Ravanan, who is travelling overseas, is also actively engaged in these deliberations, the people said. Discussions have taken place with KKR and the family office of an Indian billionaire with interests in technology and consumer brands, said one of the sources. Investment banking sources add that KKR has already sounded out several financing banks about funding a possible purchase.

But a deal without management rights and board representation will be difficult to sell. Among the possible solutions being discussed is a buyback.

The founders are said to be exploring the option of pledging their shares to raise funds and buy Siddhartha’s stake.

The founders are also believed to have met officials at Kotak Mahindra Bank.

Kotak, KPMG and Mape are advisers in this transaction. Natarajan and Sanjay Nayar, CEO of KKR in India, declined to comment.

Ravanan denied any such move. “Every quarter, after we do the results announcements, we come and meet the large investors in Mumbai as a non-deal roadshow.

This is part of our regular quarterly thing,” said Ravanan over phone from the US.

“Absolutely unequivocal confirmation (that there has been) no meeting whatsoever with KKR or anybody of that sort.

Have not done any such meeting, have no plans for any such meetings.” Ajit Isaac, chairman and managing director of Quess Corp, in which Canadian billionaire investor Prem Watsa’s Fairfax has a stake, denied that there were any discussions with the company.

This followed reports that Watsa too had been sounded out. “No one has approached me offering me their stake and we are not in any discussion at this point,” Isaac told ET. Isaac is known for friendly, transformative deals and may be in the ring if the current set of suitors fall through, said people with knowledge of the matter.

Quess has grown its revenues on the back of acquisitions and is building an IT services practice. The four founders — Subroto Bagchi, NS Parthasarathy, Natarajan and Ravanan — who together control 13% of the company, face the prospect of their single-largest investor cashing out his 21% stake to a strategic buyer such as LTI or Baring Private Equity Asia, the latter being the controlling shareholder of another mid-tier IT firm Hexaware. Siddhartha is determined to sell his stake in the next 10 days and has sought binding offers from all suitors this coming week, said people close to him.

A passive investor, Siddhartha backed the founders led by Ashok Soota in 1999.

Soota exited the company in 2011.

Siddhartha has been looking to monetise his investments since last November to address his own liquidity issues.

He is said to be negotiating for a price of Rs 1,000 a share. Ravanan, who’s the CEO and holds less than 1% stake, is the last of the founding team to lead the company and has been among the most resistant to any deal, said the people cited above.

The founders have been nudging Siddhartha to exit through the stock markets, which would be impractical for the seller.

Publicly they have maintained that they are not looking to sell their stakes and intend to make the company stronger as they target to enter the billion dollar revenue club in fiscal 2020. PE investors are looking at affirmative shareholder rights and have told the founders that they are happy to back them but not remain passive investors. “It’s very difficult to own a quarter of the company and then confront the incumbent management.

Without rights or a proper shareholder agreement, it would not meet our internal IRR threshold,” said a senior executive involved in ongoing discussions on condition of anonymity. LTI too is not keen to be seen as a hostile corporate raider even though AM Naik, the non-executive chairman of the company, and the one seen to be leading the negotiations with Siddhartha wants to play the role of an industry consolidator.

Efforts are therefore on to garner wider support from other institutional shareholders of the company and pick up a bigger stake, thus triggering an open offer for up to 26% of the company, in an effort to accumulate as close to 51% as possible.

It could not be verified whether Mindtree founders had held discussions with LTI in the past few days. The people cited above said another 3-4% stake may be available once Siddhartha exits, allowing a buyer to come close to the 26% threshold that will trigger an open offer. According to sources directly involved in the process, Naik had offered Rs 1,150-1,200 per share for the company as early as December but wanted Siddhartha to win management support. This, however, could not be independently verified.

The share closed at Rs 909.45 on Thursday for a market value of Rs 14,934.45 crore.

Analysts expect final bids in the range of Rs 850-1,000 per share if a deal were to take place now. For most analysts, Mindtree’s strength in digital competencies and portfolio alignment to growth areas will drive above-industry growth rates even as a potential increase in the on site cost structure is a concern. “The stock’s valuations have also become more acceptable post the 20% underperformance over the last six months to the Nifty IT Index,” said Pankaj Kapoor and Parth Thakkar of JM Financial.

“That said, concerns on demand outlook, growing supply-side pressure and a potential liquidity event restricts us from turning favourable at the current levels… Potential stake dilution by a large financial investor (media report here) is also an overhang.”




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