When Tata Steel sealed the Corus deal earlier this year, the question uppermost in most minds was: How was the company going to fork out $12.1 billion required for the transaction? The task got tougher following an increase of $0.8 billion in the working capital of Corus. So the net acquisition cost was $12.9 billion and not $12.1 billion, as indicated earlier. Raising that much money was not going to be easy by any stretch of imagination. But the Tatas are not known to give up, especially not in a situation where they had pulled out all the stops to acquire the Anglo-Dutch steelmaker. In the end, a combination of instruments was deployed to raise the required money. In a sense, the fund-raising initiative undertaken for the Tata-Corus deal is a case study in itself.
The company, for one, raised $6.1 billion in debt through its subsidiary Tata Steel UK. It employed a similar strategy to raise about $2.66 billion in bridge loans from its Singapore subsidiary Tata Steel Singapore Holdings. An additional $1.8 billion was raised with the help of internal accruals ($700 million), external commercial borrowings ($500 million) and a preferential issue of equity shares to Tata Sons ($640 million).
This was not all. The company announced that it would raise a further amount of $2.3 billion through a rights issue of equity shares ($862 million), a convertible preference share issue ($1 billion) and a foreign issue (either GDR or ADR for $500 million).
Though the deal size of the Corus acquisition lent itself to a structuring of this nature, the fact remains that India Inc?s growth appetite is driving it to seek new avenues, opportunities, and yes, new ways of raising capital.
Take the $6billion acquisition of Novelis by Hindalco, a key M&A transaction this year. Since the acquiree had debt on its books to the tune of about $2.4 billion, it was taken up by Hindalco, bringing down the net acquisition cost by about $3.6 billion. Almost $3 billion was raised by way of a bridge loan for 18 months in Hindalco. A rights issue of $600 million was also made, but this amount, claims D Muthukumaran, vice-president, Aditya Birla Management Corporation Ltd, which is the group?s think-tank, has yet to be utilised.
?It has been kept aside,? he says. Of course, it?s not difficult to gauge why that has been the case because much of the financing of the transaction has been taken care of via debt. Money for the transaction, in other words, was realised by leveraging the balance sheet of Hindalco, whose debt-equity ratio was low.
That is the point. Debt and equity continue to be the predominant means by which corporates are raising money. But the question is: Is the going simple? Above all, are funds easy to come by? ?Yes,? says Ajay Arora, partner, transaction advisory services, Ernst & Young. ?In terms of availability of capital, this is probably one of the best phases for corporate India. The cost of funds on the debt side is going up, but given the growth that Indian companies are seeing, they are in a position to absorb the cost,? he says.
Says Ravi Nedungadi, president and chief financial officer, UB Group, ?There is ample liquidity in the marketplace. Procuring funds is not an issue, at least not for a company with sound business fundamentals and a project that is enticing.? Says Sunil Sapre, chief financial officer, Godrej Consumer Products, ?The sentiment is positive. So that is bound to help.?
Just how much corporates have been mopping up in terms of money can be gauged from figures provided by New Delhi-based Prime Database. Till October ?07 for the current financial year, the amount raised through initial public offerings (IPOs), follow-on public offerings (FPOs), qualified institutional placements (QIPs) and debt private placements (that is, issue of non-convertible debentures, bonds with a tenure of one year and above excluding term and syndicated loans from banks) in the domestic market alone was Rs 21,509.74 crore, Rs 10,586.98 crore, Rs 11,836.61 crore and Rs 55,920.85 crore, respectively.
These figures when compared with figures last year indicate the hectic activity of corporates in terms of fund-raising this year. For the entire fiscal year ?07, the amount raised through IPOs, FPOs, QIPs and debt private placements was Rs 23,706.16 crore, Rs 1,287.20 crore, Rs 4,963.03 crore and Rs 93,855.24 crore, respectively.
Quite clearly, equity has been the preferred mode for fund-raising for corporates this year given the amount raised through IPOs, FPOs and QIPs in the domestic marketplace till October this year.
But the debt component is growing too. In fact, of the Rs 93,855.24 crore raised through debt instruments last year, the contribution of the private sector was Rs 14,000-15,000 crore, particularly since banks and financial intermediaries are very active on the private placement front. Till the month of June this year, the figure had gone up to Rs 23,000 crore and is likely to cross Rs 30,000 crore by the end of the current financial year.
With external commercial borrowings having been capped at $20 million for domestic spending to curb dollar inflows, corporates are now looking inwards, at the domestic debt market, for their capital requirements, say bond arrangers. This is despite interest rates for bonds being marginally lower at about 10-10.5% to a term loan?s 11-12% in the country.
In comparison, international debt is cheaper, but the ECB issue coupled with the on-going sub-prime mortgage issue in the US is making it tougher for corporates to borrow funds abroad. ?Lenders abroad are unwilling to commit monies on proposals at this point,? says Timmy Kandhari, executive director, PricewaterhouseCoopers.
Reiterates Muthukumaran of Aditya Birla Management Corporation: ?There is reduced appetite for Indian papers (read debt instruments) abroad.? This reflects in the funds raised from overseas bonds between April to October ?07, which was about Rs 13,065.76 crore. In the last full financial year, the amount raised from bond issues was Rs 34,059.10 crore. Given that there are only five months left for the current financial year to close, it is unlikely that bond issues will reach the kind of levels clocked last year.
In such a scenario, the off take of debt instruments, especially, of the tenure of one-year and above, in the domestic marketplace, has been growing, says A K Mittal, chief executive officer, A K Capital, one of the largest bond arrangers in the country. ?The funds generated are used for capex and other general corporate purposes,? he adds.
Equity instruments, on the other hand, have been far more successful on the international front than debt instruments, thanks to the rather long India Shining story. This mirrors the trend observed here in India, where positive investor sentiment and the need to unlock value are pushing a large number of companies, many of them unlisted, to list on the bourses.
Take the case of Reliance Retail. The company reportedly has plans to hive off different portions of its business and then list them on the bourses. The total number of listings as a result of this is likely to be 34! Then there are promoters of already listed companies, who are not hesitant to bring down stake further if that means a significant fund infusion or inclusion of a strategic partner.
A case in point is UB Holdings?s acquisition of stake in Deccan Aviation Limited, whose Indian promoters included Capt G R Gopinath. The subsidiary of the holding company of the UB group – Kingfisher Radio?first acquired a 20 percent stake in the latter for Rs 550 crore, then took it up to about 46% through an open offer recently. This obviously makes it the single largest shareholder, and by that logic in charge of day-to-day operations at Deccan.
Even established companies such as Infosys and Satyam, for instance, have lower promoter shareholdings on account of stakes held by allied shareholders including financial institutional investors and the public.
Such private equity players are perennially on the lookout for possible targets where they can invest their money, says Pradip Kanakia, head, risk advisory services, KPMG. Kanakia adds,
?Investors are keen to put their money into corporates in India because the returns they will derive from their investment will be significant. We are constantly getting requests from private equity players to introduce them to possible targets in the country.? For the record, the PE investment in India in calendar year 2006 was $7.47 billion, according to Venture Intelligence, which keeps a close watch on PE and venture capital investments in the country. According to the analysts, the current calendar year is likely to close with PE investments of over $10 billion.
Nonetheless, the million-dollar question is how long will this phase last? And going by experts? estimates, it will be on for a while, though a slowdown in the US economy, likely to set in next year, could bring down FII and allied investment and slow down the domestic economy to a certain extent. It?s no surprise then that Indian corporates are making the best of the current period, especially, when it comes to raising money. There?s no telling what the mood will be tomorrow.