AT&T picks up stake in Tech Mahindra for Rs 160 cr

AT&T Inc, the largest telecom services provider in the US, has acquired an 8.07 per cent stake in Pune-headquartered Tech Mahindra for $34.5 million (around Rs 160 crore) by exercising a 2005 option agreement to buy a stake in the company. Its stake at Tuesday's prices on the Bombay Stock Exchange (BSE), however, is worth around Rs 900 crore.

AT&T bought 9.87 million Tech Mahindra shares, according to its filing to the National Stock Exchange (NSE) on Tuesday.

Tech Mahindra had signed an agreement with SBC Services, Inc on December 28, 2004 to provide services to SBC Services and its group companies. In 2005, SBC Communications acquired AT&T, and the combined company was renamed AT&T Inc.

A May 10, 2005 agreement granted an AT&T company options over 9.98 million Tech Mahindra's shares, which are held by Mahindra-BT Investment Company (Mauritius) Limited. These options vested over a period ending April 30, 2010, if the company achieved targeted revenues from AT&T companies.

Following the agreement, SBC was granted options over Tech Mahindra's shares, representing 8 per cent of the company's fully diluted share capital as at the date of the agreement, which amounts to 9,931,638 shares of Rs 2 each.

The share prices of Tech Mahindra -- the Mahindra & Mahindra group IT company which acquired troubled IT services provider Satyam Computers last year -- fell a marginal 0.2 per cent on the Bombay Stock Exchange (BSE) to close at Rs 910.20. However, the company had not made any announcement on this exchange till the close of trading. Tech Mahindra is estimated to get around 11 per cent of its revenues from AT&T. Its contract with AT&T was extended on December 28, 2009.

Analysts are unsure whether the deal will result in increasing business from AT&T. "AT&T has got a good deal because Tech Mahindra's shares has shot up over the years. But my understanding is that AT&T has finished most of the major work with Tech Mahindra. Henceforth, the business will be stable or perhaps, even show a decline," said an analyst requesting anonymity.

A Tech Mahindra insider countered that by saying "AT&T remains a very important client to us. However, it will not have any board representation. But the deal will surely mean increased business for us. Besides, it will also help us to reach out to other US telcos to provide services like infrastructure management services (IMS) and device testing."

Tech Mahindra is a joint venture between Mahindra & Mahindra, and UK telecommunications company BT Group. As on December 31, 2009, M&M held around 44 per cent stake in Tech Mahindra while BT owned 30.85 per cent. MBTM held 8.13 per cent stake. BT is the largest customer of Tech Mahindra, accounting for around 40 per cent of its revenue.

The Tech Mahindra stock has declined 8.2 per cent this calendar year. The company's net profit for the third quarter ended December 31, 2009 dropped 22.4 per cent at Rs 172.8 crore from Rs 222.8 crore in the corresponding quarter last financial year. The numbers were impacted due to the interest cost on debt taken for the acquisition of Satyam Computer Services rebranded as Mahindra Satyam.

Revenue for the quarter at Rs 1,127.3 crore was up 4.8 per cent from Rs 1,132.2 crore in the same quarter last year. Sequentially (as compared to the quarter ended September 30, 2009) the company's net profit rose 2.2 per cent from Rs 169 crore -- and revenue grew 3.9 per cent from Rs 1,141.8 crore.

Tech Mahindra received Rs 968.2 crore from BT (British Telecom) as contract restructuring fees on certain long-term contracts. Around Rs 450 crore has been used to repay the company's debt it raised to acquire majority stake in Mahindra Satyam. By the end of December the company's debt position was Rs 1,700 crore, which it expects to come further down to Rs 1,400 crore in January. Interest expense for the quarter was Rs 45.9 crore.