The Mumbai terrorist attacks have shaken the Indian business community, and not least Ratan Tata, one of the sub-continent’s leading industrialists and chairman of the Tata group that owns the wrecked Taj Mahal hotel. But for Tata, the atrocity also comes at a time when the conglomerate faces financial challenges of its own making.
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The Tata group earlier this month was ordered to tighten its belt and put all acquisitions on hold. The chairman of India’s second largest conglomerate said in a letter emailed to managers that the measures across the group’s 98 companies were necessary to tackle the global crisis.
In February, Tata Motors Ltd purchased UK car makers Land Rover and Jaguar for $2.3 billion. Twelve months earlier, it had bought Anglo-Dutch steel maker Corus Group Plc. for £6.7 billion (Rs50,317 crore today) in India’s largest ever foreign acquisition.
Tata Steel Ltd has delayed publishing its quarterly results following the terrorist shootings in Mumbai.
Corus and Jaguar looked like trophy deals when Tata snapped them up last year. But they are both now feeling the pressure of excess leverage.
Take Corus. Tata bought the former British Steel for £6.7 billion at the top of the merger and acquisition cycle two years ago. The transaction was financed with $8 billion of non-recourse debt, and the assets ring-fenced from Tata’s other steel operations. At 5.4 times historic Ebitda (earnings before interest, taxes, depreciation and amortization), Tata pumped in leverage twice its steel rivals.
For the bet to work, Tata needed steel prices to stay high. Assuming an 8% interest rate, Tata’s initial interest payments of $640 million were comfortably covered by Corus’ $1.5 billion operating profits. But steel prices have fallen nearly one-fifth from their peak, and producers are rapidly cutting production. Corus’ financials are closely guarded, but analysts expect rivals such as ArcelorMittal to see profits fall by one-third between 2007 and 2009. The read-across gives Corus interest cover of just two times and leaves its debt at six times Ebitda.
Tata recently injected Corus with £250 million, according to Fitch Ratings Ltd. But as the global slowdown deepens, it may need to do more. In his email ordering the whole conglomerate to rein in capital expenditure, Ratan Tata said, “Some of our companies with substantial foreign operations or those which have made substantial acquisitions are facing major problems in raising capital. Liquidity will continue to be a major problem, accompanied by a depression in consumer demand.”
The catch is that continued spending at Corus is needed to maintain ageing plants and improve efficiencies.
Tata’s problems are compounded by the Jaguar purchase, which was debt-financed in a similar style. Ten months on from completion, car sales have fallen off a cliff. A $850 million rights issue just got away, but Jaguar is now reportedly seeking a $2 billion loan from the UK government which could help pay back the loan required for the deal.
With the Tata empire already under pressure to conserve cash and banks reining in lending, Tata’s best option to strengthen Corus’ position may be asset sales even though prices have fallen. Two years ago, Tata sold down some of its 80% holding in its flagship Tata Consultancy Services Ltd to fund its Corus buy. It must now be wishing it had sold more.