Tech Mahindra moves to seal Satyam takeover

Tech Mahindra is planning to use a mix of debentures, bonds, bank debt and cash to fund its Rs29bn ($585m) takeover of Satyam Computer Services as it seeks to quickly cement its hold on the scandal-tainted group, people familiar with the deal said on Wednesday.

The company has Rs7bn in cash and is raising about Rs9.5bn in non-convertible debentures, Rs2.5bn in bank loans from HSBC and Indian institution IDFC as well as Rs6bn in bonds – with additional funding coming from group companies.

Indian bank IDBI could also participate, the people familiar with the deal said.

The NCDs will be secured against Tech Mahindra’s assets and receivables while the debt could be split between the company and Venturbay Consultants, the special purpose vehicle it is using to buy Satyam.

Tech Mahindra needs to rapidly wrap up the financing for the deal to help retain the confidence of Satyam’s largest clients, which include Cisco Systems and Nestlé, as well as the company’s investors and employees.

India’s fourth-largest outsourcing company has been rocked by defections from clients such as Telstra, the Australian telecoms group, since its former chairman B Ramalinga Raju in January admitted to fixing its books in India’s biggest accounting fraud.

“Satyam has already lost about 17 per cent of its revenue base since January 2009 and management reckons that another 13 per cent loss cannot be ruled out,” Mumbai-based brokerage IIFL said in a research note.

Tech Mahindra agreed to pay Rs58 per share for Satyam, or a total of Rs28.9bn for a 51 per cent stake, after winning a high-profile auction of the company on Monday.

Tech Mahindra has told the government-appointed board of Satyam that companies belonging to its parent, Mahindra & Mahindra, could also contribute another Rs5bn to help cover the deal.

Part of an industrial group whose biggest business is tractor manufacturing, Tech Mahindra is a medium-sized information technology company specialising in telecoms.

British Telecom owns 31 per cent of Tech Mahindra and contributes more than 60 per cent of its revenue, making diversification one of the key reasons Tech Mahindra has decided to take a gamble on Satyam.

Analysts questioned the deal, saying Hyderabad-based Satyam remains a black box.

Forensic auditors are still combing its accounts and there is no visibility on the potential size of class action lawsuits against the company by US investors.

“While the proposed acquisition enhances Tech Mahindra’s service offerings and reduces client concentration, it brings a new set of unquantifiable risks,” IIFL said.