After abandoning attempts to sell its majority stake in Mphasis Ltd to a third party, global private equity firm Blackstone announced on Monday that it would move its entire majority shareholding from its current fund to two new funds.
The move would allow Blackstone, which owns 56 per cent of the IT services firm, to keep its stake for longer and pursue exit opportunities later.
Blackstone Capital Partners VI fund (BCP VI) will sell its 104.79 million shares in Mphasis to Blackstone Capital Partners VIII and Blackstone Capital Partners Asia funds, according to the PE company (BCP VIII and BCP Asia). Blackstone said that the deal would have a maximum value of Rs 15,216 crore in a notice to stock exchanges.
Transferring a company’s shareholding from one fund to another is not unusual in the private equity sector.
About PE funds
PE funds have a finite lifetime and must return capital to investors before they expire. Suppose an older fund holding an investment cannot find a buyer due to current macroeconomic conditions or is not receiving a fair price for it. In that case, the PE firm may consider selling the asset to another of its funds. It provides liquidity to the old fund’s current investors, and the PE fund will then continue to hold on to the investment until it can find buyers at a profitable price.
When a PE firm sees a long growth runway for its investment and does not want to miss out on the growth opportunities because its fund is nearing the end of its life cycle, the firm can perform a deal like this. Transferring to a new fund in this situation gives the PE firm the headroom it needs to maximize the investment’s growth potential.
“Blackstone believes Mphasis will expand from its current market capitalization of over $4 billion to nearly $10 billion. While there was increased interest from buyers after covid-19 to purchase the business, the firm has decided to keep the investment due to the expected development. “It’s not just a transition from one Blackstone fund to another,” a source familiar with the PE firm’s plans said. “There are new investors who are purchasing the firm alongside Blackstone and have done their independent evaluation of value and growth potential of the business.” He went on to say that this is India’s most significant private equity offer.
Since the sale entails a transfer of more than 25% of its stock, it triggers a regulatory open bid. Two purchasing Blackstone funds will make an offer to public shareholders to buy up to 26% of the company’s stock.
The open bid price per share has been set at $1,677.16. Mphasis shares closed at 1,722.95, up 1.49 per cent on the BSE on Monday. If Blackstone buys all of the remaining 26% via the open bid, it will have to pay $8,262 crore. For both transactions, Blackstone’s maximum purchase price would be over $23,000 crore.
To be sure, the final purchase price will be lower than 23,000 crores because Blackstone will only buy up to 75 per cent of the shares in the open bid, depending on the number of shares it acquires. If the available offer is completely subscribed, Blackstone’s acquisition of shares from BCP VI (55.31 per cent) will be reduced so that its overall shareholding does not exceed 75 per cent.
“Based on the open bid subscription, the blended selling price would range from $1,452 to $1,497 per share (12-16 per cent premium to 12-month average price and 3-6 per cent discount to 6-month average price), and the purchase consideration will range from $15,200 crore to $21,000 crore (or approximately $2-$2.8 billion),” according to a statement from Blackstone. According to the report, UC Investments, a wholly-owned subsidiary of the Abu Dhabi Investment Authority (ADIA), and other long-term investors will join Blackstone in the investment.
“Value creation has been high in the IT and digital services sectors. As global companies gradually move to the cloud, Mphasis is benefiting from powerful tailwinds. In the statement, Amit Dixit, co-head of Asia acquisitions and head of India for Blackstone PE, said, “The company is exceptionally well-positioned. Given a terrific management team, strong order backlog, long-term strategic customer base, deep domain expertise in financial services, and a world-class suite of cloud and digital offerings.”
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