BT Planning: BT Planning Stake Sale In Indian Outsourcing Firm-Sources

BT Group PLC (BT) is planning to sell a part or all of its stake in Indian software company Tech Mahindra Ltd. (532755.BY) and has mandated Swiss bank Credit Suisse Group (CS) for the deal, two people familiar with the matter said Wednesday.

Sale of its 30.9% stake in Tech Mahindra could provide the U.K. telecommunications company with about $663 million cash at current market prices, at a time when it has a huge pension deficit, which has left investors worried, said analysts who didn’t want to be named.

Pune-based Tech Mahindra could lose its status as a preferred outsourcer for BT, its main client, forcing it to compete directly with larger rivals such as Infosys Technologies Ltd. (500209.BY), they added.

Tech Mahindra has lagged peers in its recovery from the financial crisis and is just beginning to show a recovery. However, any stake sale could reduce Tech Mahindra’s dependence on a single client–a point which may please investors, analysts added.

“The firm [BT Group] is looking at various options to exit its current holding of Tech Mahindra,” one of the people familiar with the matter told Dow Jones Newswires, without elaborating. Both people didn’t want to be named.

The valuation of the deal will depend on the size of the stake sale and could vary depending on whether the buyers are willing to pay a premium for a strategic stake, the first person added.

At least two private-equity investors are keen to purchase at least a part of BT’s stake in Tech Mahindra, the second person said, but didn’t name the interested buyers.

BT Group spokesman Dan Thomas said the company doesn’t comment on rumors and speculation.

“BT has operations and investments worldwide which we regularly review. India remains a critical market both for BT and our customers,” Thomas said via email.

The U.K. company owns a 30.9% stake in the Indian outsourcing firm, he added. India’s Mahindra & Mahindra Ltd. (500520.BY) holds 42.77% of Tech Mahindra, stock exchange data showed. Tech Mahindra closed 2.1% down at INR768.70 on the Bombay Stock Exchange Wednesday, with a market capitalization of INR96.64 billion.

In May, BT Chief Executive Ian Livingston said: “Owning a minority stake in anything does not mean you have operational control, so we would not see expanding via Tech Mahindra as the way we are going to expand in Asia-Pacific.”

Referring to any stake sale in Tech Mahindra, he said: “We will look at that over time.”

Tech Mahindra spokesman Prasenjit Roy said in response to an emailed query that the company doesn’t comment on market speculation.

“It’s [the Tech Mahindra stake] not really strategically important, they [BT] have a huge pension deficit and investors are worried. They would like to have the cash in their bank account,” said James Crawshaw, analyst at S&P Equity Research in London.

Crawshaw also said the stake sale could be targeted to help sustain the U.K. firm’s dividend.

Another London-based analyst, who asked not to be named, said that if a stake sale occurs, BT will benefit from reduced prices as other Indian IT service providers compete for its business.

Tech Mahindra faces a number of challenges: 43% of its total revenue comes from Europe and 25% from North America, providing greater exposure to fluctuating global markets than its local rivals. Its profits were also affected following a stake buy in fraud-hit Satyam Computer Services Ltd. in April 2009 and the company Chief Executive Sanjay Kalra’s unexpected step-down in September.