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Acquisition funding blues

Acquisition funding blues
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First Published: Fri, Aug 22 2008. 12 21 AM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Fri, Aug 22 2008. 12 21 AM IST
There are growing signs that two high-profile global acquisitions by Indian companies are running into a spot of bother as far as their financing goes.
Illustration: Jayachandran / Mint
Both Hindalco and Tata Motors have been forced in recent weeks to tweak their proposed rights issues that are meant to raise capital to fund the Novelis and Jaguar Land Rover (JLR) acquisitions, respectively. Hindalco has had to cut the price of its equity offer as its stock has fallen in a weak market. Several banks will underwrite the current rights offer, an unusual safety net in a country where public offers are lapped up with almost blind glee.
Tata Motors, too, has said that it will mop up less than originally planned from its existing shareholders. It now plans to sell its holdings in subsidiaries to make up the difference.
Hindalco is under greater pressure to get the money. The temporary bridge loan of $3 billion that it had contracted in February has to be paid back in November. So, the company has around 10 weeks to get the money. Tata Motors has far more breathing space. Its 15-month bridge loan for $3 billion was contracted in May and is a year away from the maturity date. It has time on its side.
The financing woes of these two companies offer lessons to other Indian companies that are scouring the world for large acquisitions. There was nothing wrong in the two mega acquisitions, other than the fact that they come with the usual business risks. The eventual success of the Novelis and JLR purchases will depend on how the two businesses do in a slowing global economy and how well they integrate into the Indian companies. That will inevitably be a long and arduous battle.
But the recent episodes also show that financing of a large global acquisition is a complex and capricious task. The assumptions that you start off with may need to be tossed aside because of unexpected changes in the financial markets. In this case, the global credit crisis has made borrowing very difficult and the tumble in the stock market does not make the equity route easy either. Also, rising inflation has pushed up interest rates. These factors have clearly put Hindalco and Tata Motors on the back foot.
Equity financing of these two deals is far safer than the use of generous dollops of debt. But shareholders are not happy that they have to deal with a dilution in their earnings per share.
How can Hindalco and Tata Motors tackle their funding problems? Write to us at views@livemint.com
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First Published: Fri, Aug 22 2008. 12 21 AM IST
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