Soft markets, shy buyers hit key issues

Soft markets, shy buyers hit key issues

Mumbai: For three of India’s entrepreneurs, the time has come to pay the bills for billion-dollar acquisitions.

The flagships of the business empires of all three are raising money through rights issues or selling shares to existing shareholders at a time when global financial markets are in the middle of a raging storm.

Click here to watch video

/Content/Videos/2008-10-03/0210 Satish Expert Byte_MINT_TV.flv22d89ee6-9088-11dd-837a-000b5dabf613.flv

Ratan Tata’s Tata group is actually juggling two issues. India’s largest truck maker Tata Motors Ltd looks to raise Rs4,145.8 crore and the group’s listed investment arm Tata Investment Corp. hopes to raise Rs450 crore.

Kumar Mangalam Birla’s Hindalco Industries Ltd is raising Rs5,047.7 crore from a rights issue. And while these issues are already in the market, Tulsi Tanti’s Suzlon Energy Ltd is finalizing the pricing of its rights issue to raise Rs1,800 crore before approaching shareholders.

The timing of the issues is terrible. The financial crisis in the US and Europe has wreaked havoc with global markets. Closer home, the Bombay Stock Exchange’s benchmark 30-stock index, the Sensex, closed at 13,055.67 points on 1 October after a two-day recovery (the market was closed on Thursday). The number was 35.65% off the level at which the Sensex began the year.

Also See Trying Times (Graphic)

Yet all companies need the money to repay debts incurred to buy companies.

Tata Motors has to pay for its purchase of Ford Motor Co.’s Jaguar and Land Rover businesses, Hindalco for Novelis Inc. and Suzlon for REpower AG.

All acquisitions were made before global and local stock markets fell. And acquisitions have played a key role in helping these three entrepreneurs stitch together a global business empire.

Funding buys, backing rights

Ratan Tata has led the Tata group through a series of bulge-bracket acquisitions, spending close to $18 billion in the past eight years. Tata is believed to have a special affinity for Tata Motors and employees in the automobile company say he devotes more time to his automobile company than to any other group company under his charge.

In 2001, when the company was making a loss, Ratan Tata is reported to have accepted only a token salary of Re1 a month. He played a part in turning around the company and was the prime mover behind two of its biggest launches—the Indica in the late 1990s and the Nano earlier this year.

More recently, in August, when investors were diffident about the Tata Motors stock, Ratan Tata went ahead and bought some of them. On 6 August, he acquired 12,222 Tata Motors shares at Rs429.32 per share for Rs52.47 lakh.

The shares have since fallen even more and closed at Rs339.65 each on the National Stock Exchange on 1 October.

Ratan Tata’s investment was made with his personal money.

Meanwhile, both Tata Motors and Hindalco have said that their respective promoters have committed funds and lined up underwriters to pick up unsold shares.

“Even in the worst of times in the past companies have gone to their loyal shareholders for money. If the company has a good track record, and the avenues of investment are limited and the valuations are good, I think shareholders will look at it," said Roopen Roy, managing director of Deloitte and Touche Consulting India Pvt. Ltd told Mint on the sidelines of a recent seminar.

Shares of Tata Motors are 40.39% of their 52-week high; those of Hindalco, 44.20%, and Suzlon, 32.79%.

But most shares have fallen this year.

“It is not that there is no money in the market or investors don’t have funds. After all, they (investors) don’t have avenues to invest," Roy added.

For the Tata group, past acquisitions, such as that of UK’s Tetley Group and South Korea’s Daewoo (the trucks business) have paid off.

Only, global market sentiments are a lot more bearish now than they were even a few months ago.

“Today the market conditions are such there is absolute uncertainty," says Dinesh Lakhani, a vocal shareholder who will wait till the last day to decide whether he should apply for the Tata Motors rights issue that closes on 20 October.

Paying off debt

Just like Tata Motors, Hindalco needs the rights issue to go through. The company’s attempt to raise Rs5,047.70 crore by selling shares to existing shareholders opened on 22 September. The proceeds will part-fund the $3.03 billion that has to be repaid by Hindalco’s foreign subsidiary AV Minerals (Netherlands) BV. The second tranche of $900 million, out of the $3.03 billion comes with a floating rate, its prospectus said, “calculated for each interest period by adding margin of 30 basis points until 10 May 2008 and 80 basis points thereafter to Libor for that interest period".

Libor, or the London inter-bank offer rate, is a benchmark rate. Debt is usually priced as Libor plus a certain amount. A basis point is one-hundredth of a percentage point.

Tata Motors, too, has debt that needs to be paid off. The company’s “substantial level of indebtedness" at Rs11,584.87 crore, its prospectus said, “will increase the possibility that it may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of its indebtedness."

And apart from what’s happening in the markets, the companies also have to deal with investor sentiment.

Managing investors

Lakhani admits that the Tata group “has always rewarded" shareholders, but the falling stock is holding his hand. Tata Motors shares ended Wednesday at Rs339.25 each about 75 paise below the rights issue price of Rs340. Hindalco shares fared a little better at Rs98.55, quoting slightly above the offer price of Rs96.

Aspi Bhesania, a long-term investor in Tata Motors, said that if there is an arbitrage opportunity he will take it by selling at a higher price on the bourses and applying for rights shares at lower price. For that, he wants Tata Motors to appreciate in the run-up to the close of the rights issue. Even a Rs5 difference will help, he added.

Investors are cautious now, Lakhani said, adding that they had been hurt by past excesses in the markets.

“It weighs on the minds of the investor." Lakhani said he invested in SBI’s rights recently, but that the shares are quoting at a discount to the price at which he bought them.

Deloitte’s Roy, however, said the equity markets are not dead. “There are many types of investors. Investors who do day trading, borrow money to do trades and there are some genuine investors who hang in there for the long play."

Small shareholders, rights

Lakhani is the type of investor who prefers the time when the now defunct Controller of Capital Issues (regulator Securities and Exchange Board of India’s predecessor) used to dictate the premium firms could charge for initial public offerings and rights issues.

In the 1990s, Lakhani said, when Tata Steel Ltd (then Tata Iron and Steel Co., or Tisco) came out with a rights offering to raise Rs1,263 crore (one of the largest issues of the time), he objected to the pricing and clashed with the company’s chairman and managing director Russi Mody.

Tata Steel wanted to price its issue at Rs100, including the premium.

“I appealed to the Tata Steel board that included luminaries like the late J.R.D. Tata, and the late Nani Palkhivala and explained my thesis that the shares should be priced at Rs68 plus Rs10 face value, and that too through a staggered payment," Lakhani added.

Sensing the mood of the small shareholders, many of them senior citizens who depended on the dividend income for a living, the board reconvened for an impromptu meeting at the venue of the shareholder meeting itself, and arrived at Rs70 premium on Rs10, but without the option of a staggered payment.

Those days, Tata Steel’s promoters owned less than 10% of the company’s stock (they now do 33.94%) because J.R.D. Tata (the former head of the group) believed that small shareholders would never let the company down, said Lakhani.

Today, a rights issue is the best way for promoters to increase their stake in a company, Lakhani added—and no shareholder meeting is required to decide on the pricing of a rights issue.

While Lakhani is yet to decide whether or not to subscribe to the rights issue, it is unlikely that companies will lose their sleep over the appeal of their rights issues to so-called minority shareholders.

These shareholders are, literally, the minority.

They hold 7.03% equity in Suzlon, 10.80% in Tata Motors, and 13.71% in Hindalco.