Funds no bar for shopaholic India Inc
As India Inc realises it is possible to buy larger cos, more cos will emerge via cross-border deals.
By Ajay Jindal, TNN |
Let’s look at Indian companies, which are in the top ten of their businesses globally. Reliance Industries (RIL) got into the top ten list in polyester and polymer business at least 6-8 years ago. Bajaj Auto is the world’s second-largest two-wheeler maker. Bharat Forge has been the world’s second-largest forging company for perhaps the past 4-5 years.
Bharat Forge got there through acquisitions in Germany and in the US. Tata Tea, with its Tetley business, was also among the early ones to scale up. Crompton is among the world’s top five transformer players by virtue of its acquisition of Belgian company, Pauwels, in May 2005.
But if you look closely, there aren’t too many Indian companies with global businesses. While RIL, or others like Bajaj Auto are large in numbers, they aren’t global. It is like NSE is among the world’s three exchanges by number of trades, and LIC claims to be world’s largest insurance company by number of policies. But that doesn’t make either of them global businesses.
The current bull run though has done something remarkable — it is beginning to create truly global Indian companies. They have an international footprint, and are a force to reckon with for their global competitors.
Let’s take some names.
Tata Steel is now the world’s fifth-largest steel maker after its acquisition of Corus in January. Hindalco has become the world’s largest aluminium rolled-product company when it acquired Novelis in February. Suzlon is now among top three global wind energy companies. Suzlon acquired German company REpower in May. Another deal in May saw UB Group acquire Whyte & Mackey and become a globally relevant liquor player.
So, maybe at the rate of one a month or more, we now have Indian companies scaling up to truly global businesses. And the route they are all taking is acquisition. It appears many Indian companies have decided to go global, and through the M&A route. So, if you are a company that has decided to do a cross-border deal, how far can you go?
As examples of Tata Steel, or Suzlon, or Aban show, Indian companies can leapfrog global rankings in their business quite dramatically, if only they think big. If managements are willing, finances are not so much of a constraint. To acquire a company much larger than your own is quite possible, as many of the recent acquisitions show.
Rain Calcining, for example, has a market cap of $120 million, net sales of around $170 million and net profit of $17 million. It acquired CII Carbon for $595 million in cash, an amount almost five times its own market cap, and 25 times its FY07 net profit. Aban’s stake in Sinvest will cost it $1.25 billion. This, when its own sales were $122 million, and cash profit was around $45 million. Aban went ahead with a deal 28 times its cash profits. Aban’s market cap though was $1.7 billion.
Let us see how much does an acquirer actually needs to shell out. In cross-border deals, a special purpose vehicle (SPV) is often used, which uses high leverage. D/E (debt-equity ratio) of 3:1 are quite common for such SPVs. So the equity component may only be Rs 1,250 crore (around $300 million) for a Rs 5,000-crore acquisition or say Rs 600 crore ($146 million) for a Rs 2,500-crore deal. Aban appears to have used a 4:1 D/E for the second round of its Sinvest deal, where it paid the final $800 million. With a 4:1 D/E, you can do a $5 billion deal with capital infusion of only $1billion from the parent.
The bottomline here is — Indian companies can go for targets far larger than their operations. Global financial markets provide enough funding and deal structuring options for this.
The coming months may see many Indian companies going for truly global footprint. 2007 has already seen such deals at the rate of at least one a month. As other Indian managements wake up to the example set by the likes of Tata Steel, Aban or Suzlon, there is every likelihood of the pace of such deal making becoming faster.
Bharat Forge got there through acquisitions in Germany and in the US. Tata Tea, with its Tetley business, was also among the early ones to scale up. Crompton is among the world’s top five transformer players by virtue of its acquisition of Belgian company, Pauwels, in May 2005.
But if you look closely, there aren’t too many Indian companies with global businesses. While RIL, or others like Bajaj Auto are large in numbers, they aren’t global. It is like NSE is among the world’s three exchanges by number of trades, and LIC claims to be world’s largest insurance company by number of policies. But that doesn’t make either of them global businesses.
The current bull run though has done something remarkable — it is beginning to create truly global Indian companies. They have an international footprint, and are a force to reckon with for their global competitors.
Let’s take some names.
Tata Steel is now the world’s fifth-largest steel maker after its acquisition of Corus in January. Hindalco has become the world’s largest aluminium rolled-product company when it acquired Novelis in February. Suzlon is now among top three global wind energy companies. Suzlon acquired German company REpower in May. Another deal in May saw UB Group acquire Whyte & Mackey and become a globally relevant liquor player.
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Rain Calcining scaled up when it bought the world’s second-largest calcined petroleum coke (CPC) manufacturer a few days ago. It had earlier tried hard to buy the world’s largest CPC maker. Reliance Communications bought a large network player in the US market in July as well. Earlier, in June 2006, Aban Lloyd had become among the top world’s oil rig players by acquiring a large stake in a Norwegian company, Sinvest.So, maybe at the rate of one a month or more, we now have Indian companies scaling up to truly global businesses. And the route they are all taking is acquisition. It appears many Indian companies have decided to go global, and through the M&A route. So, if you are a company that has decided to do a cross-border deal, how far can you go?
As examples of Tata Steel, or Suzlon, or Aban show, Indian companies can leapfrog global rankings in their business quite dramatically, if only they think big. If managements are willing, finances are not so much of a constraint. To acquire a company much larger than your own is quite possible, as many of the recent acquisitions show.
Rain Calcining, for example, has a market cap of $120 million, net sales of around $170 million and net profit of $17 million. It acquired CII Carbon for $595 million in cash, an amount almost five times its own market cap, and 25 times its FY07 net profit. Aban’s stake in Sinvest will cost it $1.25 billion. This, when its own sales were $122 million, and cash profit was around $45 million. Aban went ahead with a deal 28 times its cash profits. Aban’s market cap though was $1.7 billion.
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So how are companies like Rain and Aban, unknown names till recently, doing acquisitions costing them almost Rs 2,500 crore and Rs 5,100 crore, respectively? The answer lies in the deal financials. The servicing cost on the acquirer isn’t as hard as it seems on the first glance.Let us see how much does an acquirer actually needs to shell out. In cross-border deals, a special purpose vehicle (SPV) is often used, which uses high leverage. D/E (debt-equity ratio) of 3:1 are quite common for such SPVs. So the equity component may only be Rs 1,250 crore (around $300 million) for a Rs 5,000-crore acquisition or say Rs 600 crore ($146 million) for a Rs 2,500-crore deal. Aban appears to have used a 4:1 D/E for the second round of its Sinvest deal, where it paid the final $800 million. With a 4:1 D/E, you can do a $5 billion deal with capital infusion of only $1billion from the parent.
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If the acquirer is content with say a 50% stake, the rest can be funded by friendly PE players. Or as Suzlon did with REpower, you may be able to stagger the deal payouts over 2-3 years, while you get management control and majority voting rights straightaway.The bottomline here is — Indian companies can go for targets far larger than their operations. Global financial markets provide enough funding and deal structuring options for this.
The coming months may see many Indian companies going for truly global footprint. 2007 has already seen such deals at the rate of at least one a month. As other Indian managements wake up to the example set by the likes of Tata Steel, Aban or Suzlon, there is every likelihood of the pace of such deal making becoming faster.
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