Overseas acquisitions ride on new financing options

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: Also, in many cases, the overseas sellers are private equity funds and such sellers are reluctant to accept stock because either they are looking to cash out or are unsure about the valuation of the buying firm.

While domestic acquisitions have been funded though equity funds raised through either IPOs, private placements or rights issues, overseas acquisition financing has generally been structured as leveraged buy-outs (LBOs). For example, acquisitions have been funded through debts mobilised either in the acquiring company or in a special purpose vehicle incorporated for the acquisition. Subsequently, acquiring company has reduced gearing by mobilising funds through IPOs, private placement or rights offerings.

Typical debt instruments used for financing acquisitions have been syndicated loans, external commercial borrowings or foreign currency convertible bonds (FCCBs). Equity financing has been in the form of private placements or public issues.

Syndicated loans from banks are one of the primary sources of financing the outbound acquisitions. They are currently priced at LIBOR (London Inter-Bank Offer Rate) plus 250 - 400 basis points and the tenure can vary between three and seven years. These can be raised via ECB route if raised in India or else raised outside based on the transaction structure. Typically the key factors considered by the lenders are:

FCCBs have also been quite popular instruments, especially at times of booming stock markets. These instruments have seen trigger prices for conversion of the bonds into equity at premiums to the prevailing stock price ranging from 25% to 75%. Also, the coupon rates on these bonds were usually 150-200 basis points below the general debt coupon rates.

Raising funds (debt or equity) through public issuances has been a time consuming process. However, some of the Indian companies have taken advantage of the shorter route from government designated Qualified Institutional Buyers (QIBs) who are familiar with the Indian markets. Companies have also been opting for bridge financing from the banks to raise interim funds followed by the public issuances to repay them.