3i Infotech would like exit-looking ICICI to sell stake to financial investor

As ICICI Bank looks at exiting its 20.35 per cent stake in 3i Infotech, the mid-cap information technology services and solutions company, the latter says it would prefer to have the equity go to a financial investor than a strategic partner, say its senior officials.

ICICI Bank holds this stake in the company through IDBI Trusteeships Services Ltd (ITSL), an ICICI strategic investment fund. ICICI Bank had a direct stake of 9.62 per cent in 3i as of June 30 last year; it had since sold this stake entirely in the open market over a period of time.

What remains is the 20.35 per cent (39 million shares) stake held through ITSL. At today’s price of Rs 61.55 per share, this would be valued at Rs 240 crore.

Reason why
“From a management perspective, we would be comfortable with a financial investor, as they invest in the company since they believe in the growth of the business. But a strategic investor may have other plans for the organisation, which may, sort of, change the structure of the company. But the choice of buyers is entirely with ICICI,” said Amar Chintopanth, Deputy Managing Director and Chief Financial Officer of 3i.

“Besides, if you look at the acquisitions that have happened in the IT space, there are very few strategic buy-outs that have happened,” he added.

ICICI Bank also holds a 21.38 per cent stake (19.46 per cent directly and another 1.92 per cent through ICICI Prudential Life Insurance Company) in Firstsource, the business process outsourcing company. The bank has to reduce its stake in both Firstsource and 3i to below five per cent to comply with regulations of the US Federal Reserve, since it is operating in the US and wishes to continue to do so.

According to the Fed’s regulatory requirement, a bank holding company or its parent company cannot have non-banking business, other than financial business like securities.

“We have been approached by several private equity players but we direct them to ICICI, as they have to take the call,” said Chintopanth.

Debt recast
The company is in talks with bankers to re-finance its Rs 400-450 crore of loans into long-term debt. “This is an ongoing process. The total debt on the book is Rs 2,100 crore at the end of FY10. We have already refinanced some of the debt by taking a $105 million long-term debt from Axis Bank. Besides, ICICI Bank and IDBI gave us Rs 350 crore long-term debt. At present, we are in talks with some banks to refinance the short-term debt of Rs 400-450 crore,” added Chintopanth. The company’s debt ratio has improved to 1.5.

The debt on books is on account of the foreign currency convertible bonds (FCCBs) the company had raised and the acquisitions the firm has been doing. 3i Infotech since 2000 has acquired 40 firms at a cost of Rs 1,700 crore.

The company raised a total of Rs 878 crore through FCCBs ($150 million and ¤30 million).

Of this, it has bought back some of the FCCBs. “We have to some extent reduced our debt. We bought back some FCCBs, we also raised funds through QIPs. We are rationalising the debt to equity ratio by getting the debt repayment to a level that can be managed with the company’s cash flow,” said the CFO.