MUMBAI/BANGALORE U.S.-listed software firm iGate IGTE.O, backed by private equity firm Apax Partners, is buying a majority stake in India's Patni Computer Systems PTNI.BO for $1.2 billion, marking one of the largest deals in India's technology sector.
Small-and mid-cap IT services firms have been grappling with tepid demand and high attrition rates due to tough competition from larger rivals, and a rise in costs expenses in India's $60 billion software services sector.
Combining operations would allow mid-sized companies such as iGate and Patni to increase scale and target bigger clients for outsourcing contracts in India's export-driven IT services industry.
Patni, ranked No.7 in the sector and smaller rival iGate, will be better placed to take on bigger rivals such as Infosys Technologies Ltd and Wipro Ltd (WIPR.BO) to compete for orders from overseas clients..
"There is scope for consolidation in this sector and it will happen," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial. "Smaller players will have to get together for value creation," he said.
iGate said it agreed to pay 503.50 rupees a share for a 63 percent stake in Patni, valuing the deal at $921 million. It will buy an additional 20.6 percent stake through an open offer to Patni minority shareholders for $301 million.
The price of 503.50 rupees a share reflects a premium of 9.4 percent over Patni's closing price on Friday of 460.10.
The stake is being sold by Patni's three founding brothers, who collectively own 45.6 percent, and private equity firm General Atlantic, which owns 17.4 percent, iGate said.
Talks to sell a stake in the software services exporter had been going on for about two years. A deal had been expected to be announced a week ago, but was delayed due to valuation gaps with potential buyers, sources had told Reuters.
iGate Chief Executive Phaneesh Murthy said the acquisition, which is expected to close in the first half of this year, would help boost its revenue, customers and service offerings.
Patni shares were up 1.2 percent at 465.80 rupees at 2.41 p.m. on Monday, in the main Mumbai market .BSESN down 1.8 percent.
"It's not a price one would be gung-ho about, for sure," said Tejas Doshi, head of research at Sushil Finance in Mumbai. "Investors in Patni should have got a much better price. But from iGate's perspective, its an asset worth buying at this price," he said.
FINANCING THE DEAL
The last big deal in the Indian IT sector took place in April 2009, when Tech Mahindra (TEML.BO), a mid-sized software firm and a unit of tractor and utility vehicle maker Mahindra & Mahindra (MAHM.BO), agreed to buy Satyam Computer SATY.BO at a premium of 23 percent.
Apax will bring in up to $480 million for the acquisition of Patni's majority stake, and iGate will raise debt of up to $750 million from Jefferies & Company and RBC Capital Markets, Murthy told a news conference.
Standard Chartered (STAN.L) and Jefferies & Company advised the iGate-Apax consortium on the deal. Credit Suisse and Ambit Capital represented Patni and General Atlantic.
Patni, also listed in New York PTI.N, is one of the pioneers in India's software sector and provides technology outsourcing services to industries such as insurance, telecoms, utilities and retail.
"We don't see any overlap in clients, in fact we see synergy. The overall portfolio is extremely complementary. That is what we want to focus on," Patni Chief Executive Jeya Kumar told reporters on a conference call.
Patni's clients include General Electric Co (GE.N), Hitachi (6501.T) and Procter & Gamble Co's (PG.N) Gillette brand.
Patni has more than 16,000 staff, 282 clients and revenue of $689 million for the 12-month ended Sept 30, 2010. iGate, with 8,278 employees and 82 customers, had $252 million in revenue at the end of the 12-month period on Sept, 2010.
(Additional reporting by Prashant Mehra, Manasi Phadke and Tanmaya Nanda in MUMBAI; Editing by Jui Chakravorty and Anshuman Daga)