Satyam takeover: LandT seen as favourite

Larsen and Toubro looks best placed to pounce on Satyam Computer Services if India’s market regulator relaxes a rule on takeover pricing for the fraud-hit outsourcing company.

After spending around 7 billion rupees ($140 million) on its stake, LandT, India’s leading engineering and construction firm, has become Satyam’s biggest shareholder as the government-appointed board of Satyam is seeking a strategic investor for the firm.

“They have been looking to grow their IT business and have been looking at a large IT business, this will take it to a logical conclusion. They can merge LandT Infotech into Satyam,” said V.K. Sharma, head of research at Anagram Stock Broking.

LandT built up a 4 per cent stake in Satyam by early January, only to be blindsided by its Jan. 7 disclosures of massive accounting fraud that have left the outsourcer struggling for survival. Satyam’s founder chairman and former managing director are being held in jail.

As other potential bidders emerged for the company, LandT trebled its shareholding to 12 per cent to protect its interests and keep open the option of quickly raising the size and value of its own smaller outsourcing unit.

It could increase its stake further, but once its holding hits 15 per cent it would have to make an open offer for another 20 per cent of the company — at the average share price over the last six months, according to Indian takeover law.

Satyam’s market value has plunged to about $800 million from $7 billion in May 2008.

Currently, the mandated six-month average would work out to an offer price of about 325 rupees, according to Thomson Reuters data showed –versus Friday’s close of 54 rupees. An average price over 10 days would work out to about 38 rupees.

US-based outsourcer iGate and India’s Spice group, among others, have expressed interest to buy Satyam, attracted by the firm’s global clientele such as General Electric and Nestle and bankers say LandT was unlikely to shy away from a bidding war.

“If any of the bidders look to build half of Satyam’s business, it would take them 5 years. Right now, they are looking purely at cash accretion to their existing businesses,” said Sanjeev Patkar, head of equities at Dolat Securities.

Last week, Satyam said fund manager Fidelity raised its holding in the company to 6.8 per cent and since then Fidelity has increased its stake further.

Bankers say foreign takeover interest is limited in Satyam given the lack of clarity on the company’s books, and a number of class action lawsuits filed by US shareholders.

COMMITTED BUYER

Funding is unlikely to be a problem for LandT. Its senior vice-president for finance R. Shankar Raman said last week LandT had cash and cash equivalents of $920 million at the end of 2008.

Add in its existing sizeable stake, a strong brand image and relationships with domestic institutions and funds that owned more than 15 per cent of Satyam late last year, and bankers say LandT is well placed to see off other bidders.

State-run Life Insurance Corp, which owns 4.3 per cent of Satyam, is also the largest shareholder in LandT with a 17.4 per cent stake at the end of 2008.

“Going by what has happened, I believe LandT is committed to a deal. They would be prepared to go the distance,” said a banker who has previously advised LandT. He declined to be named as he was not authorised to speak to the media. Satyam’s board has named Goldman Sachs and India’s Avendus to find a strategic bidder for the company.

Even if LandT loses a bidding war, it will probably gain in another way. Having raised its stake to 12 per cent from 4 per cent when Satyam shares were under 40 rupees, it lowered the average cost of its stake to about 80 rupees a share.

“It is playing into a bidding war. LandT need not worry about losing. It just increases the chances of exiting the investments at a profit,” said a banker not involved in the deal.

In mid-January, Satyam’s new board said it would take 8 to 12 weeks to restate its accounts for a number of years.

“Besides the floor price, the only other deterrent is the complete lack of clarity on Satyam’s financials,” said an analyst at a Mumbai brokerage, who asked not to be named as he was not authorised to speak to the media. He said a board seat might give LandT a better idea of the real state of accounts.

Infopediass