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KPIT finally lists its engineering business, launches open offer
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Background...

KPIT has listed its engineering business on the exchanges on 22nd April. It may be recalled here that merger took place in Jan 2019. Earlier this week, It has also issued an open offer to acquire 26% of public shareholding in KPIT Technologies (KPIT) at INR66.5/share. 


It may also be noted that KPITTECH is currently in Trade-to-trade segment and will come in EQ segment from 8 May, 2019 only.

Open offer details...

KPIT’s promoters intend to buy Birlasoft’s shares in the Engineering business. According to the SEBI’s regulations for open offerthis transaction makes it mandatory for KPIT to issue an open offer for minority shareholders. The open offer is to acquire 71.2m of fully paid-up equity shares of face value INR10, representing 26% of the fully diluted voting equity share capital of KPIT from public shareholders of the target company by acquirers along with KPIT promoter group

The open offer of INR66.5 is at depressed valuation and much below expectations. Why?  Simple, promoters do not want to attract any further tendering from market participantsThey want to increase their shareholding in the company as of now. Their shareholding will go up from ~13% to ~39by buying Birlasoft’s promoter shares.

Assuming full acceptance of the open offer, the total consideration payable by the acquirer will be INR4.73b. Interestingly, the consideration for 25.5% equity purchase from Birlasoft is ~INR3.07b (cash), which pegs the transaction purchase value at INR44/shareCMP is INR103.

On the other hand, promoters of KPIT Engineering are selling their stake in Birlasoft IT at INR138/share CMP is INR102
 
Favourable to the promoters?
 
Definitely YES. They are buying their own stock at less than 50% of the current market value and selling the IT business at ~39% premium to the current market value. 

According to KPIT.... this was the pre-agreed price determined at the time when IT Services was 70% of the business and Engineering was 30%. When the open offer was made in Jan’18 post the announcement of the proposed transaction at INR180/share, IT business was valued proportionately at INR120 and the Engineering business at INR60.  Since then, the Engineering business’ per share value has been diluted further, post the merger with Birlasoft, without any impact on its financials. This is in line with the prospects of the engineering business which has flourised but IT business has lagged behind and struggled in past few quarters.
 
Disclosure : This is NOT a recommendation to buy and sell securities as mentioned in the article. This is only an illustrative note to a special situation case involving M&A. Please do your own due diligence before taking any positions. Writers and Authors of this article may have positions in the market in the scrips included above.


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