Private equity (PE) players and investment bankers are divided over the timing of the BT Group's reported move to exit Tech Mahindra. BT owns about 30 per cent in TechM.
While a section feels that BT should wait till the merger of TechM and Mahindra Satyam, as it will get a better valuation due to the entity's size, others say selling the stake before the merger will be more beneficial.
Reports of BT wanting to exit TechM have been doing the rounds for quite some time. This time, too, according to reports, private equity companies Apax Partners, Providence Equity and Goldman Sachs are in talks with BT.
"BT is in a much more strategic position to take this call. But I think it makes sense for them to exit before the merger, rather than later. From a market perspective, there are two important things to note. First, the merger will take at least six months; two, the markets are at such a precarious point that no one knows how they will chart by then," said Jagannadham Thunuguntla, equity head, SMC Capital.
"BT does not comment on rumour and speculation. BT has operations and investments worldwide, which we regularly review. India remains a critical market both for BT and our customers, and we expect to continue developing both the operational network and service presence that we have established over a number of years," said BT in an emailed statement.
At the current market price, BT's 30 per cent (37.7 million shares) in TechM is valued at approximately Rs 2,900 crore. This, according to many, is the biggest hurdle for the stake sale.
"If you look at the size, BT will expect its 30 per cent stake to get it anything between Rs 3,000-4,000 crore ($700-800 million). Which private equity player is ready to sign such a big cheque for a firm where there is still uncertainty? Besides, for PE players, I do not think Tech Mahindra will be an attractive target," said the chief of a PE fund.
Some experts said it also depended on why BT wanted to exit. It is known that BT has operational pressures and its investment in TechM is not core to it. For the quarter ended June 30, its revenue was down four per cent. It has a net debt of £8,879 million.
This is one of the reasons many PE players say that selling stake after the merger will be a better bet.
"Selling of 30 per cent stake at one go is not possible. Anyway, they are looking at a part sale. Once the merger happens, the promoters' stake will come down. But they would still try and own at least 45 per cent stake in the company by creating a trust fund. As for BT, though its holding goes down, it will be easier for it to sell its stake in two or three blocks. One will be taken by Mahindra & Mahindra and the two smaller chunks can then get PE interest," said a banker.
A merged entity will give BT a higher valuation. Besides on November 15, Mahindra Satyam will announce its first and second quarter results of 2010-11. This would give better clarity on the operations, said Deven Choksey of KR Choksey Securities.
At present, TechM manages to get a committed annual business of over $1.5 billion from BT. On the other hand, BT has been able to get better pricing from Tech Mahindra due to its stake in the company.
