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Investors View of L&T ‘s Satyam Bid

March 19, 2009

The winning bidder for Satyam takes a 31% stake, via newly issued shares, and then makes a public offer for 20% of the enhanced capital at same price. Post close of the public offer, if an investor has <51% stake, it has option to subscribe to additional new shares, such that they will not have more than a 51% stake. Press reports suggest that Larsen & Toubro (L&T) is a serious contender in the fray. L&T has Rs45.5bn of resources to bid for Satyam. In the event of a winning bid it may have to spend between Rs15bn (Rs30/share of Satyam) to Rs45bn (Rs90/share of Satyam). It is difficult to quantify the stake value in Satyam post a potential win given lack of clarity on: Financials, Business continuity, Client losses, and Liabilities. Satyam’s trading band of Rs40–50 over the last 2.5 months could be an indication of the market expecting a winning bid.

If L&T loses/does not bid for Satyam, and instead repays ~Rs40bn of debt, then L&T parent EPS could increase 7% and cons. EPS by 6%. Using our current valuation metrics the fair value would go up to Rs658 (from Rs622). In our view, L&T has de-rated quite a bit due to Satyam concerns, and some investors might view Scenario 2 positively.

Keeping aside, short term stock performance, if L&T is able to Win Satyam Computers at a reasonable Rs 30 to Rs 40 bid and able to convert big clients from Satyam into L&T Infotech [its own subsidiary] it will be in the long term interest of L&T shareholders.

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