Mergers and acquisitions, one of the sexiest things in business, are also fraught with risk. After years of furious expansion including leveraged buyouts of cheap foreign assets, India Inc is now slowing down and shaking off its large bank debts
Cause, pause and effect holds good for contemporary India Inc. After years of furious expansion, including mergers and acquisitions of cheaper global assets, it was time to pause as corporates slowed down to examine their over leveraged balance sheets. The 2008 worldwide meltdown took a heavy toll on companies small and big. This was a tipping point between order and chaos. In parallel, it became for one and all the difference between what one wanted and what one feared. The width of an eyelash becoming the determinant.
I remember Hindustan lever chairman Susim Datta telling me years ago that M&A is one of the sexiest things in business, but it has a soft underbelly which is always fraught with risk with cultural and human resource issues dominant.
Tata Steel is the latest instance of failing in its endeavour to absorb a bigger company. I also remembered now discredited industrialist Vijay Mallya’s words reverberating — “I am not a corporate museum, I will get out of businesses which don’t have a strategic fit with my core competence of liquor and beverages”. This was almost 20 years ago when Mallya began consolidating his liquor business and jettisoning all that did not fit.
A whole catalogue of reasons has played havoc with corporate blueprints: Business and commodity cycle downturn, prolonged up cycle in interest rates, export markets drying up, expansion plans derailed due to environmental and forest clearances, consumption slowdown, judicial activism, witch hunt by the 5Cs — CVC, CAG, CBI, CIC and courts, policy paralysis et al.
Corporates themselves began to look into their mirrors finding mountains of debt impinging on their business performance. ‘Sexy’ leveraged buyouts of cheap international assets contributed in some cases, while other factors debilitated others.
Take Tata Steel — rising costs, weak demand, over supply, cheap imports and currency volatility brought the company to its knees. Tata Steel India, the parent company, was keeling over with Rs71,798 crore consolidated debt while its standalone debt was Rs25,332 crore. When it acquired Anglo Dutch steelmaker Corus in 2007, the $12.1 billion buyout was touted as the arrival of the Indian transnational corporation seeking a global footprint, reminding me of Datta’s ‘sexy’ nomenclature.
Even after exiting its assets in UK and Europe, Tata Steel may continue to be saddled with a humungous 1,30,000 member pension scheme, a liability no one is willing to take over. In a late April report by IIFl, this imponderable has been shown for what it actually is — this could leave Tata Steel in UK with no assets but pension funds.
Gains from the asset sale depend critically on how the pension funds are dealt with. Pension fund deficit has increased to 485 million pounds sterling at the end of FY 2015. Exit from the pension fund might not be easy since: One, Tatas might have to contribute about GBP 3.5 billion to sell the fund to professional managers; two, The fund might not meet the criteria for takeover by the Pension Protection Fund; and three, since July 2014, Tata Steel has refinanced debt worth $8.5 billion, of which $1.5 billion was refinanced in December 2015. This included debt (borrowing of six billion dollars) originally incurred in relation with the $12.1 billion acquisition of Corus Group Plc in 2007.
As bank debt became hot button, it was imperative for corporate India also to introspect on the way forward. Self realisation is the best whetstone, and as more and more industrialists felt that there was a quantum surge in threat analysis to their own books and businesses, they decided to shake the tree and become debt free.
Deals Concluded:
Jindal Steel & Power: Sajjan Jindal’s JSW Energy will buy 100 per cent of brother Naveen Jindal’s Jindal Steel and Power 1,000 MW thermal power plant in Chhattisgarh at an enterprise value of Rs4,000 crore.
Jaypee Group: Jaiprakash Power Ventures sold two of its hydro plants of 1391 MW capacities for Rs9,200 crore to JSW Energy in September 2015. Jaiprakash Power Ventures is now left with three thermal power plants and one hydro power plant, which are also reeling under pressure led by fuel supply constraints and weak demand.
Jaiprakash Associates has agreed to sell its cement business, except its Karnataka cement assets, to UltraTech Cement, for Rs15,900 crore. In FY16, the group managed to pare down debt by Rs25,100 crore. Jaiprakash Associates sold the Jaypee Group headquarters, commercial space and 250 acres of land in its Noida township project for Rs2,700 crore to Axis Bank.
GMR: The group has sold 30 per cent stake in its energy arm to Malaysian energy firm Tenaga Nasional Berhad for Rs2,000 crore. In March, the company sold 51 per cent stake in its 99km highway project in Karnataka to its joint venture partners in Rs1,078 crore deal. Prior to this, GMR sold 74 per cent stake in Jadcherla Expressway to SBI Macquarie in February 2013 and 74 per cent in GMR Ulundurpet Expressways to India Infrastructure Fund in September 13. Both these stake sales together fetched GMR Rs428 crore.
The GMR group also offloaded its stake in its foreign ventures. It sold its 70 per cent stake in Singapore-based Island Power for Rs2,600 crore and two coal blocks in its Canadian subsidiary for Rs201 crore in March 2013. The group also gave up its 40 per cent stake in Istanbul international airport to Malaysian Airports Holding Berhard for Rs1,740 crore in April 2014.
lanco Infratech: In August 2014, lanco sold its Udupi power plant to Adani Power for Rs6,000 crore. As part of the deal, Adani took over the plant’s Rs4,000 crore worth of debt and lanco got Rs2,000 crore in cash, which it used for lowering its debt.
Suzlon Energy: In January 2015, Suzlon sold its German subsidiary Senvion to private equity company Centerbridge Partners for Rs7,200 crore.
Bharti Airtel: In a deal worth Rs1,925 crore, Airtel sold 2.91per cent equity in Infratel through a secondary market deal in February 2015. Then in October 2015, Bharti sold about 8,300 mobile towers in Africa for approximately Rs11,000 crore.
SREI Infrastructure Finance: The company sold its entire 18 per cent stake in telecom tower company, Viom Networks to American Tower Corporation for Rs2,931 crore.
Essar Group: In March 16, Equinox Realty, the real estate arm of Essar Group, sold its under-construction residential project, Water’s Edge, in Bangalore to developer SNN Builders for Rs300 crore. In February 2016, Essar entered into a pact to sell its 1.25-million-sq-ft commercial project, Equinox Business Park, in Mumbai to RMZ Corp for around Rs2,400 crore.