Negotiations between Blackstone Group and Carlyle for the biggest technology takeover in India have hit a bump as Mphasis’ share price continues to soar, people involved in the matter said.
Differences in valuations resulted in Carlyle walking away—at least temporarily—after emerging as the sole bidder for the Blackstone-controlled IT services company. If the impasse between two of the largest private equity groups continues, Blackstone may pull the plug on the deal, undoing a full-blown auction managed by Morgan Stanley, the people said.
ET was the first to report in its February 25 edition that Washington DC-based Carlyle Group was the only bidder for the $3 billion Mphasis purchase after Bain Capital and Brookfield did not submit a binding offer.
The Rs 1,450-Rs 1,500/share offer was already at a 11% discount at the higher end to the then market price of Rs 1,691 apiece. An acquisition would have led to a change of control and triggered an open offer for an additional 26% shareholding of the company.
Carlyle had stitched together a consortium of half a dozen banks and financial institutions —Deutsche Bank, Barclays, Standard Chartered Bank, Nomura, and Canada Pension Plan Investment Board—to finance the acquisition. JPMorgan, which is advising the fund, may join the consortium. An arm of the Canadian pension fund may offer mezzanine debt, while the other firms are likely to come on board as senior lenders.
Banking officials said the financing commitment lapsed late last week and the banks now need to reapply internally.
“It’s pen-down for the moment… Each bank will have to go back to their respective credit committees as it’s a large leverage that Carlyle is taking on,” said an official aware of these negotiations on condition of anonymity because the talks are in the private domain.
Carlyle plans to lever up to 6.5 times Mphasis’s FY21 expected Ebitda of Rs 1,821.7 crore to bankroll the transaction.
“It’s like a game of poker. Who blinks first, the buyer or the seller,” said one person. “With interest rates firming in the last few weeks, Carlyle, too, may need to renegotiate the terms with the lending banks.”
Carlyle declined to comment. Mails sent to Blackstone and Mphasis on Saturday didn’t elicit any response. Most analysts, though, expect the deal with Carlyle to go ahead, possibly after price adjustments.
Bull Run
Blackstone, the world’s largest PE fund, wanted to capitalise on the current bull run that helped the Mphasis stock to appreciate more than 90% over the past 12 months and 7% year to date and cash out. However, the high valuation of a listed company in India proved to be a damper.
At Friday’s close of Rs 1,631.30, Blackstone’s 56.12% stake in Mphasis would fetch Rs 17,115 crore ($2.3 billion). If the open offer is fully subscribed, it would translate into a total pay-out of Rs 25,044.38 crore ($3.4 billion).
Blackstone had considered block trades in the secondary market, said one person aware of the discussions.
“It’s tough to do a block trade involving such volumes. It will lead to significant discounting and Blackstone would not want that,” said an investment banker who specialises in technology trades.
Growth Story
Blackstone acquired Mphasis from HPE for $1 billion in 2016, its biggest bet in India.
Consistent growth at Mphasis and healthy deal wins in the direct channel have impressed the street, despite concerns about deterioration in the legacy channel. As the only Indian IT company whose core business (direct core) is expanding at over 20%, analysts are confident Mphasis will continue to grow.
“This is the fourth consecutive quarter of $200 million+ deal wins and approximately 71% deals are in new-gen services. Management strategy of agile organisation design of tribes and squads focused on specialised capabilities has accelerated deal-win momentum, with tribes-led deals up 64% YoY,” said Shashi Bhushan, an analyst at Axis Securities, after the company announced its third-quarter results at the end of January.
When Blackstone acquired Mphasis, HPE agreed to provide Mphasis a minimum revenue commitment of $990 million over five years. Of this, $141 million is yet to be consumed in the three quarters to September 2021.
Outside of that, the deal pipeline nine months into FY21 stood at $866 million, an increase of 52%. Some, therefore, believe the company is still trading at a discount.
“The stock has been trading at 19x FY22ii P/E, at a 14% discount to peers, adequately pricing in the risks from the DXC channel,” argued Rishi Jhunjhunwala, an analyst with IIFL in an end-January report. “In our view, the risk is client concentration.”
Source: Economic Times