L&T's bid may dislodge TechM in two major verticals

The hostile takeover bid by engineering behemoth Larsen and Toubro (L&T) to acquire Bengaluru-based mid-tier IT services company Mindtree, will be overtaking India's fifth largest IT services firm in two major verticals -- BFSI, hi-tech and media.

According to a report put out by Elara Capital, the merger of Mindtree, with L&T Infotech -- the IT services arm of the engineering behemoth is inevitable. "We believe this will inevitably lead to a merger of LTI and Mindtree, as L&T is unlikely to retain two listed entities with complementary capabilities in the same industry," the report said.

L&T, the parent of L&T Infotech, has acquired a stake of 20.3% in Mindtree, by acquiring Cafe Coffee Day owner, VG Siddhartha’s stake. The LTI-Mindtree combined entity will have trailing 12-months (TTM) revenue of $837million in banking, financial services and insurance (BFSI), $520 million in hi-tech & media and $554 million in manufacturing, retail and CPG.

In the case of BFSI vertical, TechM has a TTM revenue worth $662 million, which is 21% lower than the LTM revenue of the combined entity.

Similarly, in the case of hi-tech and media vertical as well, TechM has a TTM revenue of $356 million, which is 31% lower than the combined entity.

In all the other verticals, TechM will continue its dominance. However, many see the management resistance to the take over as the key-hinderance.

"We expect L&T to force a merger via share swap with an attractive swap ratio. We expect a swap ratio that could imply 20-23x FY20E P/E to Mindtree (or an implied price of Rs 1,050 to Rs 1,200/share for Mindtree). We do not expect an all-cash deal as delisting will be difficult, given Mindtree management’s 13.3% shareholding will prevent L&T from reaching the 90% threshold to force delisting," the report by Elara Capital said.

Mindtree management has made it clear through public statements that it is convinced the L&T stake acquisition is not in the interest of Mindtree stakeholders.