ar_46_sandeepjorasia_indian corporates on an acquisition spree

8/7/2019 AR_46_SandeepJorasia_Indian Corporates on an acquisition spree

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FACULTY OF MANAGEMENT STUDIES

INDIAN CORPORATE ON AN

ACQUISITION SPREE:

A DETAILED ANALYSIS

PROJECT REPORT

SANDEEP JORASIA

8/11/2010


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INDIAN CORPORATE ON AN ACQUISITION SPREE:

A DETAILED ANALYSIS

2

ContentsAN OVERVIEW .................................................................................................................................. 3

OBJECTIVES OF THE STUDY .............................................................................................................. 6

LITERATURE: ..................................................................................................................................... 7

Acquisition ................................................................................................................................... 7

Emerging Trend and Its Effect ...................................................................................................... 7

Liberalization of Overseas Investment Policy .............................................................................. 7

Legal Framework .......................................................................................................................... 8

Funding ........................................................................................................................................ 9

Finance By Indian Banks ............................................................................................................... 9

(a) TATA CORUS DEAL .................................................................................................................... 10

Timelines .................................................................................................................................... 11

Snapshot of the deal .................................................................................................................. 12

Short-Term Implications ............................................................................................................ 13

Equity dilution: ....................................................................................................................... 13

Margin picture: ...................................................................................................................... 13

The steel cycle: ....................................................................................................................... 14

Long-Run Picture ........................................................................................................................ 15

Progress on low-cost slabs ..................................................................................................... 15

Restructuring at Corus: .......................................................................................................... 16

Synergies: ............................................................................................................................... 16

(b) BHARTI- ZAIN DEAL ................................................................................................................... 18

Timelines: ................................................................................................................................... 18

Snapshot of the Deal: ................................................................................................................. 20

(c) TATA MOTORS AND JAGUAR LAND ROVERS DEAL ................................................................... 24

Timelines- ................................................................................................................................... 24

Snapshot of the Deal: ................................................................................................................. 25

Need for growth ......................................................................................................................... 27

Competitive advantage .............................................................................................................. 27

CONCLUSION- ................................................................................................................................ 28

REFERENCES: .................................................................................................................................. 29


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AN OVERVIEW:

In 90s when late P.M PV Narsimha Rao laid the foundations for freeing up of our

economy, many people were saying that our Indian corporations were not yet ready to

face the competition. Much of that fear had to do with lack of equity, low quality

production, huge pricing power due to no-competition etc. Indian companies then were

not ready to give up their pricing power and ramp up quality production and thus were

against (not really against, but forced the political leadership to go slow) opening up of

our economy. However, our country slowly started freeing up economy and fortunately

too our companies had worked hard to grow on par with global standards.

Every now and then we read about our companies acquiring foreign companies. Looking

at the speed of acquisitions that Indian corporate are making we can truly say that Indian

corporate are on a acquisition spree. Let us see some of acquisition that have been made

by Indian companies in recent past

1) Bharti acquiring Zain telecom2) Bharti acquiring Warid telecom3) Tata buying Jaguar and Land Rover4) Tata acquiring of Corus5) Hindalco acquiring Novellis a Canadian company6) Videocon acquiring Daewoo electronics7) Tata Tea acquired Energy brand8) Dr Reddys acquired Beta Pharm9) Suzlon energy acquired Hansen Transmission10) Aban Lloyd acquired Sinvest11) ONGC acquired Omimex De Columbia


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12) Ranbaxy acquired Terapia

If we closely look at these deals they are from different market segments like telecoms,commodities, pharma, Oil and Gas, beverages etc. This is pretty much a healthy trend and

is instilling a confidence among us that our Indian companies are scaling up globally. Just

few years ago, we were looking up to Microsoft, yahoo, oracle etc to start their

development centres here. We were very much interested in having MNCs here and it

was talk of the country when A.P Chief Minister wooed Bill Gates with Power Point

presentation to set up Microsoft subsidiary in Hyderabad. Now all that changed, Indian

companies are MNCs for West and rest. Indian companies now have moved off of theirprotectionist mindset to that of confident mindset. They have started acquiring companies

abroad. How did all this change in a span of 10 years? The change we are witnessing now

is very dramatic and sudden. What caused that change or what is pushing them to shun

fear?

The trend began haltingly a few years ago. In 2000, Tata Tea took over a global company

twice its size, Tetley Tea, the second biggest tea company in the world. This was

followed by Essel Packaging, owned by Subhash Chandra, took over Propack of

Switzerland to form Essel Propack. The merger created the biggest producer in the world

of laminated tubes, and an Indian MNC became global number one. But these takeovers

remained exceptional events till 2003. Only in that year did the pace of Indian takeovers

accelerate so much as to constitute a new trend. More than 40 foreign companies were

taken over by Indians in 2003. Among the Indian companies on a takeover spree were

Tata Motors, Ranbaxy, Wockhardt, Hindalco, etc. The trend of acquiring foreign

companies was not limited to large size companies. Many middle-sized companies have

also become a part of this new trend. Sundaram Fasteners has acquired Dana Spicer

Europe, the British arm of a global multinational. Amtek Auto, another auto ancillary has

acquired the GWK group in the UK, which is twice its size are some of the few middle

sized companies which have joined the bandwagon. The trend continued with Indian

companies shelling out $1.7 billion in the first eight months of 2005 for acquiring

overseas companies. The biggest of the takeovers till date being the Tata Steel's $12.1

billion deal for Corus, the British steel company.


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The increased number in overseas acquisitions by Indian companies is attributable to the

growing realization that the future growth of Indian companies will be influenced by the

share that they can garner in the world market. This is not only by producing in the

country and exporting, but also by acquiring overseas assets, including intangibles like

brands and goodwill, to establish overseas presence and to upgrade their competitive

strength in the overseas markets, which has resulted in cross-border acquisitions.

The policy regime in respect of outward capital flows has also evolved in spirit with the

above trend. In line with the calibrated approach to capital account, greater freedom is

now available to companies to make remittances overseas for their overseas expansion.

This is reflected in the increasing global operations of Indian companies in search of

global synergies and domain knowledge. Phased liberalization in the policy of overseas

investments has enabled Indian firms to establish presence in overseas markets on an

unprecedented scale redefining the global outreach of Indian entities.

The market is dictating and the Indian companies are delivering, so the growth story is

accelerating at a pace which we didnt expect. The investors are smart here. They are

taking money out of West depressing the company stock there and are stashing it in India

and forcing us to buy those depressed companies in West.

What is actually happening is movement of money from West to East. The money hence

will be in better hands and will see growth before it moves elsewhere. There is ample

proof of this trend. Hindalco is much smaller in market cap compared to Novellis and

similarly Tatas too is small compared to Corus and still we saw deals going through only

because institutional investors wanted it that way.

Graphical representation of Indian outbound deals since 2000


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OBJECTIVES OF THE STUDY

The following are the objectives of this report:

1. To find out the reasons behind this exponential growth of acquisitions and theirsuccess rates.

2. To study the M&A trends in the Indian Corporate Sector post liberalizationperiod.

3. To examine the following three casesa. Case 1: Tata- Corus Deal (Steel)b. Case 2: Bharti- Zain Deal (Telecom)c. Case 3: Tata JLR Deal (Automobile)

4. To forecast future scenario and trend


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LITERATURE:

Acquisition

An acquisition, also known as a takeover, is the buying of one company (the target) by

another. An acquisition may be friendly or hostile. In the former case, the companies

cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought

or the target's board has no prior knowledge of the offer. Acquisition usually refers to a

purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will

acquire management control of a larger or longer established company and keep its name

for the combined entity. This is known as a reverse takeover.

Section 395 of the Companies Act, 1956 provides the basic guidelines for acquiring an

Indian company by another Indian company. While overseas acquisitions would be

governed by the Takeover regulations applicable in the country where the target company

is situate.

Emerging Trend and Its Effect

The overseas acquisitions, which started off on a small scale, have reached to globally

visible levels with big ticket acquisitions being announced by large corporate regularly.

Tata group, Bharat Forge, Infosys, Wipro, ONGC, Ranbaxy and such Indian companies

are venturing overseas and expanding at breakneck speed. The effect of this trend on the

Indian economy has been rightly summarised by the Financial Minister

Mr.P.Chidambaram - "Indian industry today has the confidence to bid for business

abroad, raise resources, purchase and manage enterprises."

Liberalization of Overseas Investment Policy

The liberalisation of investment policies has made large outward remittances for overseas

acquisitions possible. Such policies have in particular expanded after the introduction of

the Foreign Exchange Management Act, in June 2000. In March 2003, the Automatic

Route was significantly liberalised to enable Indian parties to fund to the extent of 100%

of their net worth, which limit was later enhanced to 200%. As per a recent Federation if

Indian Chambers of Commerce and Industry (FICCI) study, while India Inc's

international acquisitions were rising gradually till 2004, the liberalization in the policyregime for outward investment in 2005, which allowed Indian firms to invest in entities


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abroad up to 200% of their net worth in a year, triggered a sharp rise in cross-border

acquisitions with the number of acquisitions rising from 46 in 2004 to a whopping 130 in

2005.

During 2007-08 (April-December), 1,595 proposals were approved for investments

abroad in JVs and WOSs by the Reserve Bank of India, which were higher by 25.8 per

cent than approval during the corresponding period of the previous year. All these factors

have provided the necessary thrust for the increase in the overseas investments and

acquisitions.

Legal FrameworkIndian companies wanting to acquire companies abroad have to comply with various

aspects of The Companies Act of 1956, the Foreign Exchange Management Act of 1999,

The Securities Exchange Board of India Act of 1992, and the various regulations imposed

by the Reserve Bank of India. Also, the Take Over regulations applicable to the target

company would need to be adhered to.

The Indian companies may invest overseas either through the automatic route or with the

approval of the RBI. The present legal framework provides for investment overseas by

Indian companies up to 200 per cent of their net worth as per the last audited balance

sheet, in any bonafide business activity are permitted by Authorised Dealers (AD). Also

no prior approval of RBI is required for opening offices abroad. For initial expenses, AD

banks have been permitted to allow remittance up to 15 per cent of the average annual

sales/income or turnover during last two financial years or up to 25 per cent of the net

worth, whichever is higher.

For recurring expenses, remittance up to 10 per cent of the average annual sales/income

or turnover during last two financial years is allowed. Within these limits, ADs can allow

remittance by a company even to acquire immovable property outside India for its

business and for residential purpose of its staff. The Indian investors would also have to

file forms ODG/ODI depending on their method of investment in an overseas firm. The

detailed guidelines have been provided under Notification FEMA 120/RB-2004 dated

July 7, 2004, which is amended time to time.


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Funding

Overseas acquisitions are being funded through a variety of sources such as drawl foreign

exchange in India, capitalization of exports, balances held in Exchange Earners ForeignCurrency accounts (EEFC), share swaps through ADR/GDR, External Commercial

Borrowings/Foreign Currency Convertible Bonds, ADRs/GDRs, etc.

A substantial portion of investments takes place through special purpose vehicles (SPVs)

set up for the purpose abroad. Existing Wholly Owned Subsidiaries (WOS) / Joint

Venture (JV) or the SPVs are being used to fund acquisitions through Leveraged buy-out

(LBO) route. In fact the Tata Corus deal was made possible by the scheme of leveraged

buy-out.

The major investment destinations appear to be the US and European markets. Tax

havens like Mauritius and Cayman Islands also feature significantly in the Indian

acquisitions or setting up of new WOS/JVs. In recent times, sustained growth in

corporate earnings has boosted the profitability and strengthened the balance sheets of

Indian companies. This has, in turn, strengthened their credit ratings and ability to raise

funds overseas.

Unlike most international M&A transactions that typically feature stock swaps in the

financing arithmetic, Indian acquirers have for the most part paid cash for their targets,

helped by a combination of internal resources and borrowings. Share swaps have not yet

emerged as a favoured payment option in India, except in a couple of large transactions in

the software industry.

Finance By Indian Banks

In view of the expertise in certain areas developed by Indian corporate over the years and

the importance attached to leveraging of such expertise for enhancing the international

presence of Indian corporate, with effect from June 7, 2005, banks have been allowed to

extend financial assistance to Indian companies for acquisition of equity in overseas joint

ventures/wholly owned subsidiaries or in other overseas companies, new or existing, as

strategic investment, in terms of a Board approved policy, duly incorporated in the loan

policy of the bank. Such policy should include overall limit on such financing, terms andconditions of eligibility of borrowers, security, margin, etc. While the Board may frame


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its own guidelines and safeguards for such lending, such acquisition(s) should be

beneficial to the company and the country. The finance would be subject to compliance

with the statutory requirements under Section 19(2) of the Banking Regulation Act, 1949.

In April 2003 banks were permitted to extend credit/non-credit facilities to Indian Joint

Ventures (JVs) (where the holding by the Indian company is more than 51%) / Wholly

Owned Subsidiaries (WOS) abroad up to the extent of 10 per cent of their unimpaired

capital funds subject to certain terms and conditions. On November 6, 2006, in order to

facilitate the expansion of Indian corporate business abroad, it was decided to enhance

the prudential limit on credit and non-credit facilities extended by banks to Indian Joint

Ventures (where the holding by the Indian company is more than 51%) /Wholly Owned

Subsidiaries abroad from the existing limit of 10 per cent to 20 per cent of their

unimpaired capital funds.

Let us study some of the deals to have a look what are the forces behind these takeovers

(a) TATA CORUS DEAL


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Timelines

On October 20, 2006, Tata Steel announced that it had agreed to pick up a 100%stake in the Anglo-Dutch steel maker Corus at 455 pence per share in an all cash

deal, cumulatively valued at GBP 4.3 billion (USD 8.04 billion).

On November 19 2006, the Brazilian steel company CSN launched a counter offerfor Corus at 475 pence per share, valuing it at $8.4 billion.

On December 11 2006, Tata preemptively upped the offer to 500 pence, whichwas within hours trumped by CSN's offer of 515 pence per share, valuing the deal

at $ 9.6 Billion. The Corus board promptly recommended both the revised offers

to its shareholders.

On December 11, 2006, CSN announced a formal offer for the Company at anoffer price of 515 pence per Corus Share , valuing the deal at $ 9.6 Billion.. The

CSN Acquisition would also be implemented by way of a scheme of arrangement

and is subject to a pre-condition that either Corus Shareholders reject the Tata

Scheme or the Tata Scheme is otherwise withdrawn by Corus or lapses. TheCorus board promptly recommended both the revised offers to its shareholders.

Also on December 19, 2006, UK Watchdog the Panel on Takeovers and Mergersannounced that the last date for each of Tata and CSN to announce revised offers

for the Company, should they wish to do so, is 30 January 2007. They also

warned that it would begin an auction procedure if the two remained in

competition.

On January 31 2007 Tata Steel won their bid for Corus after offering 608 penceper share, valuing Corus at $11.3bn


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Snapshot of the deal

Sector SteelAcquiring Company TATA Steel

Acquired Company Corus

Value of the Deal $11.3 billion

Financing the deal Equity and debt

This was the largest deal in the Indian history of cross border acquisition where TATA

acquire Corus which is four times in size. In a giant leap, Tata Steel's acquisition of the

Anglo-Dutch steel major Corus has vaulted the former to the fifth position from 56th in

global steel production capacity. With the exception of Arcelor Mittal, which has

combined production capacities of 110 million tonnes, Tata Corus, with a capacity of

23.5 million tonnes, will be only 5-7 million tonnes shy of the next three players

Nippon Steel, Posco and JFE Steel. At the same time, it will also have players such asBaosteel, US Steel, Nucor and Thyssenkrupp breathing down its neck in the global

sweepstakes.

Spelling out the rationale for the deal, Mr Ratan Tata, Chairman, Tata Sons, has claimed,

"... it will take several years for us (Tatas) to build a 19-million-tonne enterprise from

scratch, leave alone establishing it in Europe with a brand name." In that sense, it is

obviously an important strategic move for Tata Steel with long-term global implications

in a consolidating sector.

This hotly-contested mega deal has, however, come at a stiff price of $12.1 billion in

equity value and with a debt component of around $1.5 billion Corus as an enterprise is

worth $13.6 billion. That takes the winning final bid for the shares of Corus 34 per cent

higher than the initial offer the Tatas made on October 20.

The Tata Steel stock has shed over 10 per cent since the acquisition and has also been a

sharp under-performer relative to the broad market and its sectoral peers over the past six


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months. With the debate on "overvaluation' and "winner's curse" hanging over this deal,

here is a look at the implications from a short- and long-term investment perspective:

Short-Term Implications

Investors with a one-to-two year perspective may find the Tata Steel stock unattractive at

current price levels. While the potential downside to the stock may be limited, it may

consolidate in a narrow range, as there appears to be no short-term triggers to drive up the

stock. The formalities for completing the acquisition may take three to four months,

before the integration committees get down to work on the deal. In our view, three

elements are stacked against this deal in the short run:

Equity dilution: The financing of the acquisition is unlikely to pose a challenge for the

Tata group, but the financial risks associated with high-cost debt may be quite high.

Though the financing pattern is yet to be spelt out fully, initial indications are that the

$4.1 billion of the total consideration will flow from Tata Steel/Tata Sons by way of debt

and equity contribution by these two and the balance $8 billion, will be raised by a

special investment vehicle created in the UK for this purpose. Preliminary indications

from the senior management of Tata Steel suggest that the debt-equity ratio will be

maintained in the same proportion of 78:22, in which the first offer was made last

October.

Based on this, a 20-25 per cent equity dilution may be on the cards for Tata Steel. The

equity component could be raised in the form of preferential offer by Tata Steel to Tata

Sons, or through GDRs (global depository receipts) in the overseas market or a rights

offer to shareholders.

This dilution is likely to contribute to lower per share earnings, whose impact will be

spread over the next year or so. As Tata Steel also remains committed to its six-million-

tonne greenfield ventures in Orissa, its debt levels may rise sharply in the medium term.

Margin picture: Short-term triggers that may help improve the operating profit margin of

the combined entity seem to be missing. In the third quarter ended September 2006,

Corus had clocked an operating margin of 9.2 per cent compared with 32 per cent by Tata


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Steel for the third quarter ended December 2006. In effect, Tata Steel is buying an

operation with substantially lower margins.

This is in sharp contrast to Mittal's acquisition of Arcelor, where the latter's operating

margins were higher than the former's and the combined entity was set to enjoy a better

margin. Despite that, on the basis of conventional metrics such as EV/EBITDA and

EV/tonne, Arcelor Mittal's valuation has turned to be lower than Tata Corus. On top of

that, Tata is making an all-cash offer for Corus vis--vis the cash-cum-stock swap offer

made by Mittal for Arcelor.

Corus has been working on the "Restoring Success" programme aimed at closing thecompetitive gap that existed between Corus and the European steel peers. The gap in

2003 was about 6 per cent in the operating profit level when measured against the

average of European competitors. And this programme is expected to deliver the full

benefits of 680 million pounds in line with plan. With this programme running out in

2006 and being replaced by `The Corus Way', the scope for Tata Steel to bring about

short-term improvements in margins may be limited.

Even the potential synergies of the $300-350 million a year expected to accrue to the

bottomline of the combined entity from the third year onwards, may be at lower levels in

the first two years. As outlined by Mr B. Muthuraman, Managing Director of Tata Steel,

synergies are expected in the procurement of material, in the marketplace, in shared

services and better operations in India by adopting Corus's best practices in some areas.

The steel cycle: While the industry expects steel prices to remain firm in the next two-

three years, the impact of Chinese exports has not been factored into prices and the steelcycle. There are clear indications that steel imports into the EU and the US have been

rising significantly. At 10-12 million tonnes in the third quarter of 2006, they are twice

the level in the same period last year and China has been a key contributor.

This has led to considerable uncertainty on the pricing front. Though regaining pricing

power is one of the objectives of the Tata-Corus deal, prices may not necessarily remain

stable in this fragmented industry. The top five players, even after this round of

consolidation, will control only about 25 per cent of global capacities. Hence, the steel


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cycle may stabilise only if the latest deal triggers a further round of consolidation among

the top ten producers.

Long-Run Picture

Whenever a strategic move of this scale is made (where a company takes over a global

major with nearly four times its capacity and revenues), it is clearly a long-term call on

the structural dynamics of the sector. And investors will have to weigh their investment

options only over the long run.

Over a long time-frame, the management of the combined entity has far greater room to

manoeuvre, and on several fronts. If you are a long-term investor in Tata Steel, the key

developments that bear a close watch are:

Progress on low-cost slabs: Research shows that steel-makers in India and Latin

America, endowed with rich iron ore resources, enjoy a 20 per cent cost advantage in slab

production over their European peers. Hence, any meaningful gains from this deal will

emerge only by 2009-10, when Tata Steel can start exporting low-cost slabs to Corus.

This is unlikely to be a short-term outcome as neither Tata Steel's six-million-tonne

greenfield plant in Orissa nor the expansion in Jamshedpur is likely to create the kind of

capacity that can lead to surplus slab-making/semi-finished steel capacity on a standalone

basis.

Second, there may be further constraints to exports as Tata Steel will also be servicing the

requirements of NatSteel, Singapore, and Millennium Steel, Thailand, its two recent

acquisitions in Asia.

However, this dynamic may change if the Tatas can make some acquisitions in low-cost

regions such as Latin America, opening up a secure source of slab-making that can be

exported to Corus's plants in the UK. Or if the iron ore policy in India undergoes a

change over the next couple of years, Tata Steel may be able to explore alternatives in the

coming years.


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Restructuring at Corus:

The raison d'etre for this deal for Tata Steel is access to the European market and

significantly higher value-added presence. In the long run, there is considerable scope to

restructure Corus' high-cost plants at Port Talbot, Scunthorpe and the slab-making unit at

Teesside.

The job cuts that Tata Steel is ruling out at present may become inevitable in the long

run. Though it may be premature at this stage, over time, Tata Steel may consider the

possibility of divesting or spinning off the engineering steels division at Rotherham with

a production capacity of 1 million tonnes. The ability of the Tatas to improve the

combined operating profit margins to 25 per cent (from around 14 per cent in 2005) over

the next four to five years will hinge on these two aspects.

Two factors may soften the risks of dramatic restructuring at the high-cost plants in UK.

If global consolidation gathers momentum with, say, the merger of Thyssenkrupp with

Nucor, or Severstal with Gerdau or any of the top five players, the likelihood of pricing

stability may ease the performance pressures on Tata-Corus.

Two, if the Tatas contemplate global listing (say, in London) on the lines of Vedanta

Resources (the holding company of Sterlite Industries), it may help the group command a

much higher price-earnings multiple and give it greater flexibility in managing its

finances.

Synergies:

-Tata was one of the lowest cost steel producers & Corus was fighting to keep its

productions costs under control.

-Tata had a strong retail and distribution network in India and SE

Asia. Hence there would be a powerful combination of high quality

developed and low cost high growth markets

-Technology transfer and cross-fertilization of R&D capabilities.

-There was a strong culture fit between the two organizations both of which highlyemphasized on continuous improvement and Ethics.


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-Economies of Scale.

-Increase in profitability.

-Backward integration for Corus and Forward integration for Tata

Steel


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Now let us take the latest acquisition that is of Zain Telecom by Bharti.

(b) BHARTI- ZAIN DEAL

Timelines:

Let us see how a process of acquisition takes place by looking at the Bharti-Zain deal as

how it worked out.

Bharti was reported to have shown interest in Zain long time back around July, 2008.

That had closely followed a month later after Africas largest Telco MTN had spurned

the alliance proposal of the Indian Company. While it remained as a speculation and soon

faded with time, the news again became the major headlines in the mid of February,

2010.

14th February, 2010:- Bharti offered $10.7 billion to buy African assets of Kuwaits Zain

telecom, the former Celtel networks which was acquired by Zain for $3.4 billion in 2005.

15th February, 2010: Airtels shares slip by 10% as the news about the buyout spreads

around. Bank of America-Merrill Lynch said that the valuation seemed rich, the growth

outlook for Zains African portfolio was unexciting and a potential deal could materially

stress Bhartis balance sheet. Zains African operations had incurred a loss of around $1

million in nine months until Sep 2009 and this kind of criticism was bound to rise.
http://www.financialexpress.com/news/Bharti-seen-in-talks-with-Kuwaiti-telco-Zain/330626/http://www.financialexpress.com/news/Bharti-seen-in-talks-with-Kuwaiti-telco-Zain/330626/


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18th February, 2010: Bharti announces that out of the total agreed enterprise valuation of

$10.7 billion, the company would pay a total of around $9 billion and that $1.7 billion

would be paid a year later after the deal is closed.

19th February, 2010: Two minority share holders of Zain in Africa, Econet Wireless

Holdings Ltd and Broad Communications Ltd, objected to any transfer of the companys

Nigerian assets. Econet which held 5 per cent of Zain Nigeria and Broad

Communications which owned 14 per cent stake in Zain Nigeria wanted some legal

issues to be solved before Zain was handed over to Bharti. Econet wanted to overturn the

2006 deal in which Celtel, now Zain, bought a controlling 65 per cent stake in the

business while Broad wanted to enforce its rights in any potential transfer of ownership

of its shareholding in Celtel.

22th February, 2010: Rumours arose that Bharti might sell its shares to Singapore

Telecommunications that owns just under a third of the Bharti Airtel , in order to partly

fund its purchase and avoid taking on too much debt.

4th March, 2010: Akhil Gupta, group deputy CEO and MD of Bharti Enterprise hinted

that new shares might be issued by Indian Telco Bhatia Airtel or it might strip down its

holdings in telecommunication infrastructure companies to reduce the burden of debt. He

said that the company would use a combination of free cash flow and equity to repay debt

and that there was a possibility to raise more equity at Airtel or Bharti Infratel level.

9th March, 2010: Sources revealed that Bharti would raise $7b in loan to finance the

purchase through a six-year U.S. dollar loan with an average maturity of 4.75 years.

Another $2 billion to $3 billion would be raised by a rupee loan.

15th March.2010: SingTels CEO International Lim Chuan Po confirmed that the

company would be a part of the funding process for Zains purchase by Bharti but it

would not inject money directly into Bharti Airtel. It would instead finance the

acquisition via debt.

16th March, 2010: The legal conflict between Econet and Bharti were reported as being

solved to great extent. However there was no such intimation from Econet.


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16th March, 2010: Indian Telco Bharti Airtel issued a term sheet to banks in order to

raise up to $8.5 billion in offshore loans to fund its $9 billion deal.

22nd March, 2010: Bharti board approved $9 billion Zain deal and planned to make a

formal offer the following week.

25th March, 2010: The board of Kuwait-based Mobile Telecommunications Co. KSC,

Zain approved the sale of its African assets to Bharti Airtel Ltd at $10.7 billion.

29th March, 2010: A source revealed that the deal over Bhartis purchase of the African

assets of Kuwaits Zain would be signed in Amsterdam on Tuesday.

29th March, 2010: The government of Gabon raised a regulatory objection to the deal. It

said that Zain Gabon had not complied with telecoms regulations and thus

itdisapproved of the sale of Zains Gabonese assets, and reserved the right to take all

necessary measures.

31st March, 2010: Economic Times reported that $10.7-billion deal, including $1.7

billion of Zains debt, was signed in Amsterdam, the base of Zains African unit

So this was the process from start to end.

Snapshot of the Deal:

Sector TelecomAcquiring Company Bharti Airtel, India

Acquired Company Zain, Africa

Value of the Deal $10.7 billion

Financing the deal Debt from SBI and other foreign banks
http://economictimes.indiatimes.com/articleshow/5744772.cmshttp://economictimes.indiatimes.com/articleshow/5744772.cms


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This is the largest ever telecom takeover by an Indian firm. Bharti Airtel completed a deal

to buy Kuwait-based Zain Telecom's African business for $10.7 billion in June 2010. The

deal marks the second biggest overseas acquisition by an Indian company, after Tata

Steel purchased Corus Group for $12.2 billion in an all cash deal in January 2007.

The Corus deal was the largest Indian takeover of a foreign company and made Tata Steel

the world's fifth-largest steel group. The acquisition of Zain's African assets also

catapulted Bharti Airtel to become the fifth largest telecom operator in the world with

revenues of an estimated $13 billion a subscriber base of over 179 million and earnings

before interest, taxes, depreciation and amortization (EBITDA) of around US$5 billion.

Bharti Airtel has been seeking an African venture since 2008. Bharti had failed twice

since 2008 to forge a $23 billion merger deal with South African telecom giant MTN.

The principal shareholders of the Zain Group of Kuwait, one of the region's largest

telecom service providers, have also been looking for a buyer for the company's assets in

Africa. This deal is expected to bring in synergy for both the companies. This acquisition,

besides giving Bharti its much-desired presence in Africa, makes it the world's fifth

largest wireless company with operations across 18 countries and a huge subscriber base.

However, the deal has also given rise to misgivings. Bharti shares plunged to around 14%

on the day of announcement of the deal. Almost every research house has been critical of

the deal. The comments range from "Pained by Zain; Rating Cut" from Bank of America

Merrill Lynch to "Very expensive diversification" by Credit Suisse.

The principal issue is one of valuations. Everyone seems to agree that Zain is a good

target for acquisition, but is it worth the price Bharti is paying? Zain's African operations

are losing money. In the nine months to September 2009, they reported a net loss of

US$112 million against a profit of US$169 million in the corresponding period the

previous year. Seven of the 15 countries reported losses. The highest revenue earner,

Nigeria, which was nudging the US$1 billion mark, lost US$88 million. These are

markets where the telephone penetration rates range from 14% in the Democratic

Republic of the Congo to 123% in Gabon, though most are in the low double digits. Zain

has 42 million subscribers in Africa (September 2009) while Bharti has 121.7 million in


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India (December 2009). Customer growth rates range from -14% in Kenya and -6% in

Nigeria to 51% in Niger. The average revenue per user (ARPU) is US$3 in Ghana and

US$25 in Gabon. The ARPU, a frequently used yardstick in the telecom industry, is an

average of US$6 for Zain's African operations against US$5 for Bharti in India.

These numbers can be used to paint an optimistic picture or a pessimistic one. For

instance, low penetration rates could mean either a huge upside opportunity or lack of

demand needing many years of expensive market development. Low ARPUs could imply

poor revenue streams or future growth potential. In contrast to Africa, in its Middle East

portfolio, Zain has an ARPU of US$55 in Kuwait and US$26 in Bahrain. But if Bharti

can successfully transpose its high minutes of use model -- described as a "minute-

factory" -- to Africa, it could be highly profitable even at these low ARPUs. Besides,

some operations are showing losses because of mismanagement.

Bharti will be paying Zain US$252 per subscriber. In September 2009, when Bharti was

trying to strike a deal with MTN, the two sides had valued each customer of the South

African firm at US$394. Vodafone paid US$743 per user when it acquired Hutchison's

India operations in February 2007. Deals a few years ago have attracted even higher

valuations in the US$361 to US$1,050 range. However what needs to be noted is that

these higher valuations of the past were out of expectations of a stupendous growth in

India's subscriber base which might not be the case with Africa. On the other hand,

supporters of the deal argue that in the long run, the strategy of getting its Foot print

across the 15 African countries is definitely a great value proposition for Bharti.

This is also a special case, because of the cultural factors involved which will influence

how the two companies will integrate their operations. Zain was launched in 1983 as the

region's first mobile operator. It was known at that time as MTC. In 1994, the company

introduced GSM technology in Kuwait, becoming one of the first companies in the region

to do so. The company embarked on an aggressive growth path after Saad Al Barrak took

over as CEO of the Zain Group in 2002. He worked hard to convert a Kuwaiti telecom

operator into a global one. With 24 countries and 71.8 million customers, Zain was close

to fulfilling Al Barrak's dream. The target set for 2011 was to be among the top 10telecom companies in the world with more than 150 million customers. The proposed


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sale of Zain Africa BV represents a change in course in the company's strategy. A few

days before the Bharti deal was announced, Al Barrak announced his resignation, which

was promptly accepted. But the Zain corporate culture is imbued with his go-getting

style. Bharti could run into integration problems in Africa.

Of the $10.7 billion enterprise value of Zain, Bharti paid $8.3 billion upfront and will pay

$700 million after a year. This wiped out the about $1.5 billion from its balance sheet. It

also took over approximately $1.7 billion of Zain's debts as on December 31, 2009. Of

the $8.3 billion paid to Zain, Bharti had raised debt from a consortium of foreign banks

and State Bank of India with the lead-arranger and lead-advisor Standard Chartered Bankcommitting the highest amount -- $1.3 billion, followed by Barclays at $900 million. The

rest of the co-advisors -- ANZ, BNP, Bank of America-Merrill Lynch, Credit Agricole

CIB, DBS, HSBC, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking

Corporation -- have allocated $600 million each. State Bank of India has agreed to an up

to $one billion loan in rupee terms.


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(c) TATA MOTORS AND JAGUAR LAND ROVERS DEAL

Timelines-

2005- Ford starts facing problems with pension and health care costs and falling sales in

North America. Starts reporting losses from the second quarter

2006-Alan Mullaly takes over as chief executive and oversees a $12.7 billion loss, the

largest in the company's history Ford decides to sell its Aston Martin brand

May, 2007- Ford closes the Aston Martin sale for $848 million

June, 2007- Ford indicates that it might look at buyers for Jaguar and Land Rover

marques

July, 2007- Ford receives preliminary bids for the brands. Reports say that TPG Inc.,

Cerberus Capital Management Lp. Ripplewood Holdings, One Equity Partners Llc are in

the fray, along with Tata Motors

Ltd and Mahindra & Mahindra


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August, 2007- Ratan Tata, chairman of Tata Motors Ltd, confirms that his company was

bidding for the premium car

Makers

November, 2007-Investment bankers say that Apollo Alternative Assets is teaming up

with Mahindra & Mahindra

Reports say that Ford has shortlisted three biddersTata, Mahindra and One Equityfor

further negotiations with its trade unions Unite, the trade union representing Land Rover

and Jaguar workers, says it supports Tata Motors' bid

December, 2007- The three bidders submit their bid

January, 2008- Ford names Tata as "preferred buyer"

March, 2008-Tata, Ford sign deal

Snapshot of the Deal:

Sector Automobile

Acquiring Company Tata Motors, India

Acquired Company Jaguar Land Rover, United Kingdom

Value of the Deal US $ 2.3 billion

Financing the deal Bridge loans, Cash reserves and

During June 2008, India-based Tata Motors completed the acquisition of the Jaguar and

Land Rover (JLR) units from the US-based auto manufacturer Ford Motor Company

(Ford) for US$ 2.3 billion, on a cash freedebt free basis. JLR was a part of Fords Premier

Automotive Group (PAG) and were considered to be British icons. Jaguar was involved

in the manufacture of high-end luxury cars, while Land Rover manufactured high-end

SUVs.

Forming a part of the purchase consideration were JLRs manufacturing plants, two

advanced design centers in the UK, national sales companies spanning across the world,

and also licenses of all necessary intellectual property rights. Tata Group had several

major international acquisitions to its credit. It had acquired Tetley, South Korea-based

Daewoos commercial vehicle unit, and Anglo-Dutch Steel maker Corus. Tata Motors

long-term strategy included consolidating its position in the domestic Indian market and


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26

expanding its international footprint by leveraging on in-house capabilities and products

and also through acquisitions and strategic collaborations.

According to this deal, Ford will contribute US$ 600 m to pension fund which will be

sufficient to meet the requirements. During the deal, there was no debt in the books

except for trade payables. Also, Ford will continue to supply Jaguar Land Rover for

differing periods with power trains, stampings and other vehicle components, in addition

to a variety of technologies, such as environmental and platform technologies. Ford

Motor Credit Company will provide financing for Jaguar and Land Rover dealers and

customers during a transitional period, which can vary by market, of up to 12 months.

The reason for Ford selling the brands includes losses by Jaguar stood at USD 715

million at the time of buying. Jaguar has not been able to provide any profit for ford

because of the high manufacturing costs in the United Kingdom. Land Rover's profit, on

the other hand, was driven by the record sale of 2.26 lakh vehicles, an 18% YoY growth

in 2007. Ford is combining both the brands since the products and manufacturing of

vehicles for Land rover and Jaguar is so intertwined Bringing down production costs and

turning around the company successfully was the challenge and Ford failed.

Initially there was investor pessimism about the deal. The chief concerns were Price,

Timing and the quality of assets. The share prices of Tata Motors were no a decline ever

since the news that Tata was in the race to acquire JLR.

There are several reasons why Tata Motors went ahead with the acquisition despite

criticism. These include:

a) Long term strategic commitment to the Automotive sectorb) Opportunity to participate in two fast growing auto segmentsc) Increased business diversity across markets and products.d) Jaguar offers a range of performance/luxury vehicles to broaden the

brand portfolio

e) Land rover provides a natural fit for Tata Motors SUV segments


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f) Benefits from component sourcing, design services and low costengineering

Recent quarterly statement shows that JLR is in a profit of 55m. Today Tata Motors has

the distinction of making cars in all price ranges from 1 lakh Nano to 1 crore Jaguar

under its brand.

Need for growth

In the past few years, the Tata group has led the growing appetite among Indian

companies to acquire businesses overseas in Europe, the United States, Australia and

Africa - some even several times larger - in a bid to consolidate operations and merge as

the new age multinationals.

Tata Motors is India's largest automobile company, with revenues of $7.2 billion in

2006-07. With over 4 million Tata vehicles plying in India, it is the leader in commercial

vehicles and the second largest in passenger vehicles.

Competitive advantageTata Motors is vulnerable to greater competition at home. Foreign vehicle makers

including Daimler, Nissan Motor, Volvo and MAN AG have struck local alliances for a

bigger presence.

Tata Motors, which has a joint venture with Fiat for cars, engines and transmissions in

India, is also facing heat from top car maker Maruti Suzuki India Ltd, Hyundai Motor ,

Renault and Volkswagen


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CONCLUSION-

The pace with which Indian Inc has been investing in M&A has stunned many. But there

have been obvious reasons why India has been hogging the limelight. The buoyancy in

Indian economy has strengthened the balance sheet of corporate enabling them to look for

inorganic growth by way of acquisitions outside India. By undertaking overseas

acquisition, Indian companies are now vying for a share in the regulated market of

developed countries. Here are some important reasons why I feel like that Indian

corporate are on an acquisition spree:

Transfer of technology (By acquiring companies abroad, Indian firms are alsogetting their hands on advance manufacturing technologies which help in

cutting the cost of production)

Competition and survival (Due to cut throat competition and desire forexpansion, acquisition is the best way to expand and grow without investing

time into it)

Support of Indian government (The RBI, in March 2003, significantly liberalizedthe policies for Indian investment abroad. It enabled the Indian corporate to

fund 100% of their net worth, which was later increased to 200%)

Various Funding options (These include drawl foreign exchange in India,capitalization of exports, balances held in EEFC accounts, ECBs/FCCBs,

ADRs/GDRs, etc along with SPVs)

Favourable domestic market (falling import tariff, increased buying power ofcustomers, low interest rates adds to corporate earnings)

Confident and adventurous leaders (Tata steel acquiring corus which is fourtimes bigger than former, Hindalco buying Novelis double of its size)


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REFERENCES:

www.moneycontrol.com

www.equitymaster.com

www.reuters.com

www.bloomberg.com

www.economictimes.com

www.tata.com

www.ford.com

www.thehindubusinessline.com

www.wirelessfederation.com

www.profit.ndtv.com

www.hindustantimes.comwww.zain.com
http://www.reuters.com/http://www.bloomberg.com/http://www.economictimes.com/http://www.tata.com/http://www.thehindubusinessline.com/http://www.wirelessfederation.com/http://www.profit.ndtv.com/http://www.hindustantimes.com/http://www.zain.com/http://www.zain.com/http://www.hindustantimes.com/http://www.profit.ndtv.com/http://www.wirelessfederation.com/http://www.thehindubusinessline.com/http://www.tata.com/http://www.economictimes.com/http://www.bloomberg.com/http://www.reuters.com/

ar_46_sandeepjorasia_indian corporates on an acquisition spree

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