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FE Editorial : Testing corporate mettle

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SummaryOne of the less discussed aspects of the global credit crisis is its impact on Indians firms that had borrowed heavily overseas to finance cross-border acquisitions.

One of the less discussed aspects of the global credit crisis is its impact on Indians firms that had borrowed heavily overseas to finance cross-border acquisitions. The total number of cross-border outbound M&A deals by Indian firms peaked at 240 (valued at $32 billion) in 2007. Not surprisingly, it coincided with a very good year for both the global and Indian economies. This year, (until September) only 170 deals have been announced thus far valued at only $16 billion. Given the state of the global economy, this number isn’t likely to increase significantly. The point of concern is, of course, the acquisitions which took place before the crisis set in. Consider some of the biggest buys and the huge debt they incurred: The Tata-Corus deal was the biggest acquisition in 2007, valued at $12.3 billion, out of which $8.2 billion is in debt. The Hindalco-Novelis deal was second largest, valued at $6 billion of which $3.6 billion is debt. The Essar Steel-Algoma deal was valued at $1.85 billon, out of which $1 billion is debt. Clearly, some of India’s biggest industrial groups have debt levels that may be hard to manage in a credit crunch. The economics of the acquisitions were calculated with a boom in mind—how they fare in a bust is open to question. Tata, for example, had hoped to service debt from Corus’s cash flows—the steel industry will, however, take a hit in the slowdown. So, the question is whether Corus’s cash flows will be enough.

The Tata group has a similar problem financing its acquisition of Jaguar and Land Rover. To fight the problem, Tata Motors came out with two unlinked rights offerings on September 29 (which closed on October 20) to raise Rs 4,147 crore to part-finance the purchase. But the response from investors was lukewarm—promoters and underwriters had to prop up the issue instead. Thus, promoter holding in the company has increased from 33.4% to 41.8% of the ordinary share capital. Tata Motors’ total debt-equity stood at 1.37:1 before the rights issue and has now dropped to 0.91:1. The rights issue of Hindalco also had to by rescued by underwriters—five underwriting banks have taken 30% of the issue to push it through. Indian industry is still learning by experience and they will now have to remember that it isn’t enough to strategise simply for good times. The coming months will test corporate mettle.

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