Why is iGate giving Patni's investors a rotten deal?

Markets have given a thumbs down to iGate’s offer for delisting the company at a floor price of Rs 356.74. The floor price, which was arrived at after taking into account a two week average of high and low prices of the stock, was offered at a discount of 9 percent to the trading price on Wednesday.

Patni Computers on Thursday moved up and traded 8 percent higher at 12.30 pm as the market believes the price offered to investors is low - and rightly so.

Consider the fact that iGate acquired the shares from Patni Computer’s promoters at Rs 503 per share. This price was offered at a time when the share price of Patni was ruling at Rs 387. iGate then made the mandatory open offer for a 20 percent stake at the same price (Rs 503). The open offer was reported to be fully subscribed. The total cost of acquiring the stake from the promoters and the shares from open offer cost the company $1.2 billion.

The remaining investors who could not sell their shares to the company at the open offer price probably held on as the share price fell and touched a low of Rs 250 in August 2011.

Now iGate has made an offer to delist the shares at a price of Rs 356.74 per share to the remaining shareholders, which is substantially lower than the price at which promoters were given the option to exit.

It is reported that the company will not go ahead with the offer if the amount needed to acquire the outstanding 19.6 percent of the shares exceeds $215 million. This works out to Rs 400 per share, which can be construed as the upper limit in the reverse book building process which is being adopted to garner these shares.

This raises the question as to why iGate wants to delist Patni at all, if it cannot afford it. Asking for a lower price for the remaining shares just because the market sentiment is bad does not reflect well on iGate’s management.

In order to successfully delist the company, iGate needs to own at least 91.06 percent of Patni. In case the open offer does not go through, iGate will have to bring down its holding from 80.4 percent to 75 percent to meet the listing norms set by Sebi. iGate will have to book a huge loss if it has to offload the extra shares, as the share price will crash if the delisting does not go through.

Given the current rate in the market it seems unlikely anyone is keen on giving iGate the shares at the price they want. The reverse book-building process could see the book attracting sellers around Rs 503 for Patni, which should be the base case price at which everyone else got to exit nine months back.