There has been a perceptible change in the way Indian companies are trying to finance their overseas acquisitions. And this is not necessarily good news for their domestic shareholders.
Hindalco last week announced plans to raise Rs5,000 crore through a rights issue. The metals company has to close a $3.03 billion bridge loan it had taken last year as initial finance for its acquisition of Canadian aluminium company Novelis. Hindalco shareholders will be offered one extra share for every three they already own. The rest of the money will be raised either through international borrowing or by using the company’s $1 billion in reserves (which is part of shareholders’ funds).
Hindalco has company. Tata Motors announced late last month that it would collect $1.7 billion through a rights issue of shares and convertible preference securities to fund the acquisition of the Jaguar and Land Rover divisions of Ford Motor Co. In this case, too, there will be a global debt issue.
The general plan for big-bang overseas acquisitions did not look like this at first. Indian companies were to float special overseas investment vehicles that would borrow from the global markets to fund Indian corporate ambition. There was to be little or no recourse to domestic balance sheets; local shareholders would not be directly exposed to the risks from these ambitious global acquisitions.
The global credit crisis intervened quite unexpectedly. It is now far more difficult to raise money for a leveraged buyout in the global debt markets. Interest rates, too, have climbed. While short-term bridge loans to make the initial purchase are available, longer-term loans that are to eventually replace the bridge loans are not easy to pick.
The Hindalco and Tata Motors examples show that domestic shareholders are now being asked to bear a far greater burden than they had originally expected, either by putting money into fresh equity or seeing their reserves being brought into play. It is possible that they will have no objections to such changes in funding plans. But it is also possible that they may.
Right now, these look like nasty surprises.
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