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5 banks set to underwrite Hindalco rights offering

5 banks set to underwrite Hindalco rights offering
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First Published: Fri, Aug 15 2008. 12 35 AM IST

Updated: Fri, Aug 15 2008. 12 35 AM IST
Mumbai: Hindalco Industries Ltd plans to have five banks underwrite its Rs4,992 crore rights issue as a safety net to ensure that it raises the entire amount, according to bankers familiar with the development.
By underwriting an issue, bankers guarantee that the funds sought by the company will be raised, as they will subscribe to any shares not taken by the shareholders.
Although not the first time, it’s rare for rights issues to be underwritten this way. Normally, the promoter group picks up the unsubscribed portion of a rights issue so it can raise its stake in the company.
Citibank India, DSP Merrill Lynch, Royal Bank of Scotland Group Plc., Deutsche Bank and home-grown SBI Caps Ltd are the bankers to the rights issue—a secondary market offering to raise money from existing shareholders.
The company said on Thursday that it will issue 520 million shares at Rs96 each to existing shareholders, a 29% discount to the current share price. Hindalco will issue three additional shares for every seven shares held, said company secretary Anil Malik.
He added that Hindalco is still negotiating the underwriting terms with its investment bankers.
The country’s largest aluminium producer needs the money to part-finance the $3.03 billion bridge loan it has taken for the purchase of Canada-based Novelis Inc. in February 2007. The amount has to be repaid by end-November.
A banker associated with the transaction claimed that Hindalco’s $1.2 billion rights issue is among the largest in Indian history and it can’t be compared with earlier issues that weren’t underwritten.
The banker added that only 16% of the issue would have to be effectively underwritten since the promoters and institutional investors will be subscribing to the issue, under normal circumstances. These investors are looking for long-term returns by buying at a hefty discount to the market price.
Underwriting acts as an assurance to the promoters that the issue will go through, said another banker involved in the deal. In the event of an unsubscribed portion, underwriters can either offer it to existing shareholders or place it with outside investors, he added.
“Some of the unsubscribed portion could be taken by the Aditya Birla group,” said another investment banker who is advising Hindalco.
None of the bankers wanted to be identified.
The Kumarmangalam Birla-led group has 31.4% stake in the company, after subscribing to preferential shares last year.
Life Insurance Corp. of India Ltd, which owns 11.13% in Hindalco, and 200 foreign institutional investors, or FIIs, which hold 12%, are expected to put in their shares for the rights issue.
The rights issue, if successful, will provide only 40% of the funds required to repay the bridge loan. Hindalco hasn’t said how it plans to raise the remaining amount.
The company had valued the Canadian aluminium maker at $6 billion last year, including debt of $2.3 billion. Hindalco had raised $4.5 billion to pay Novelis shareholders.
With borrowing costs on the rise, Indian companies such as Hindalco and Tata Motors Ltd have turned to the equity market to part-fund their large acquisitions. But, shareholders haven’t taken kindly to the plans to dilute equity. Share prices of both companies have fallen since the respective rights issues were announced.
The drop in share prices has forced the company to lower its rights issue price and dilute equity more than it had originally anticipated. This, in turn, has led to a further drop in the company’s shares.
In the past three months, Hindalco’s shares have fallen 33.59% while Tata Motors shares have dropped by more than 30%. Hindalco shares fell 3.75% on Thursday to close at Rs135.80 a share on the Bombay Stock Exchange.
The BSE’s benchmark Sensex index has fallen 15.15% since mid-May to end at 14,724.18 on Thursday, while the metal index has declined 24.77% in this period.
Underwriting right issues is common in overseas markets, one of the most recent being that of Royal Bank of Scotland. The bank had raised funds to acquire ABN Amro for £50 billion. Goldman Sachs International, Merrill Lynch International and UBS Ltd had successfully underwritten a £12 billion rights issue of RBS.
State Bank of India raised Rs16,000 crore in a rights issue in April, with its shares priced at a 30% discount at Rs1,590 each.
After any rights issue, the equity base of a company increases and the higher capital allows it to raise more debt.
On Wednesday, the Securities and Exchange Board of India, or Sebi, cut the time frame for the entire process of rights issue from 109 days to 43 days, to reduce the exposure of both firms and investors to market volatility.
Mobis Philipose contributed to this story.
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First Published: Fri, Aug 15 2008. 12 35 AM IST
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