Bharti Airtel’s Acquisition of Zain Telecom
Bharti Airtel acquired Zain Telecom in Africa for a value of USD 10.7 billion in April 2010. Bharti Airtel paid USD 7.9 billion in cash, USD 400 million as a conditional payment on fulfilment of certain criteria and USD 1.7 billion as consolidated debt obligation. The deal was to give various benefits to Bharti Airtel in terms of operational efficiencies with economies of scale as well as access to a huge African Markets with a customer base of 180 million as of 2010. The stock price declined to below Rs.300 in a few weeks after the announcement of the deal from Rs.320 levels.
In the current scenario Bharti Airtel has a very high dollar denominated debt due to the Zain Telecom acquisition of almost USD 8.6 billion. Rupee depreciation is expected to impact the earnings growth in the coming quarters for the company. The stock price for Bharti Airtel has declined to below Rs.300 on account of the impact due to Rupee depreciation inspite of the better than expected Q1FY14 earnings due to hike in overall product rates. Bharti Airtel has not opted for AS11 and therefore the impact of Rupee depreciation will be seen in the profit and loss statement in the form of mark to market losses and inflated debt in the balance sheet. Interest rate fluctuation is not taken into consideration as the losses would increase with increase in the interest rates from the sourcing entity.
The company has a debt of Rs.54,000 crores and the interest cost for FY 2012-13 was reported at Rs.4,000 crores. The company reported an interest payment of Rs.1168 crore for Q1FY14 compared to an interest payment of Rs.1115 crores for Q4FY13. The interest payments are expected to cross the levels of Rs.4,000 crores in FY 2013-14. The Net Debt to Equity ratio is 2.57 with an interest coverage at 6.47, debt to equity ratio of 1.27 and net debt in USD terms is 11.78 billion. The Sales to Debt ratio for FY 2012-13 is 1.48 and the Market Capitalization to Debt ratio is 2.47 for the company.
Bharti Airtel stock reached Rs.250 levels post the acquisition and after that has been in the range of Rs.450 to Rs.250 in the last few years.
Tata Steel’s Acquisition of Corus
Tata Steel acquired Corus for a value of USD 12.1 billion in April 2007 that made the company the fifth largest producer of steel in the world. The acquisition gave Tata Steel access to European markets with synergies in Manufacturing, Research and Development and Logistics. The deal was financed by internal accruals amounting to USD 1.267 billion, rights issue proceedings of USD 1.88 billion, external commercial borrowings of USD 500 milllion, Foreign Equity offering of USD 445 million and USD 6.143 billion of non-recourse debt taken from a consortium of Banks in UK. Immediately after the announcement of the deal the stock price of Tata Steel declined 10.7% to Rs.463.95. The debt funded acquisition was expected to put pressure on the earnings and the balance sheet.
The borrowings in foreign currency are expected to inflate on account of Rupee depreciation thereby putting further pressure on margins. The foreign currency debt of Tata Steel is unhedged and even a 5% depreciation of the rupee can impact the FY14 earnings per share by almost 30%. The total net debt stands at Rs.60,246 crores and an interest payment of Rs.992 crores for Q1FY14 and Rs.3,968 crores for FY 2012-13. The Sales to Debt ratio for FY 2012-13 is 2.23 and the Market Capitalization to Debt ratio is 0.47 for the company.
Tata Steel stock price reached levels of Rs.150 in 2008 from the levels of Rs.950 in April 2007 after the acquisition of Corus to regain the levels of Rs.650 in 2010 and 2011. The stock trades at a market price of Rs.293 per share currently which is below the book value of the company at Rs.568 per share.
Tata Motors Acquisition of Jaguar Land Rover
In June 2008 Tata Motors acquired the UK based Jaguar and Land Rover for USD 2.3 billion from the US based Ford Motors. The deal was a part of the long term strategy of Tata Motors to increase it’s international presence and consolidating its position in terms of product diversification and Research and Development capabilities. The economic slowdown in Europe and American markets posed a risk to the future of the company amidst tough market conditions along with the funding risks and the currency risks associated with the deal. Tata Motors raised USD 3 billion from banks that included JP Morgan, Citibank and State Bank of India. The Tata Group company was also under a severe cash crisis due to the Tata Steel acquisition of Corus Steel.
The recent positive sales growth for Jaguar Land Rover has generated cash for the company and has eased concerns about the debt of Tata Motors Ltd. The net debt to equity ratio stood at 0.31 for the consolidated balance sheet of Tata Motors and JLR, 0.81 for standalone Tata Motors and a loan of GBP 147 million for JLR. The Gross debt for the company as on June 2013 was Rs.58,233.5 crores against Rs.53,577.6 crores as on June 2012. The Net Automotive debt was Rs.13,385.6 crores in June 2013 against Rs.10,226.3 crores in June 2012. The Sales to Debt ratio for FY 2012-13 is 3.24 and the Market Capitalization to Debt ratio is 1.7 for the company.
The company continues to invest in Capital expenditure and Research and Development as a part of the long term strategy plan inspite of the volume of debt on the balance sheet. The stock price of Tata Motors nosedived to a record low of Rs.24.40 in November 2008 that also saw markets falling due to Lehman Brothers crisis, post the JLR acquisition, and has gradually recovered to Rs.355 on the back of growth prospects for JLR.
Hindalco’s Acquisition of Novelis
Hindalco acquired Novelis at a price of USD 6 billion that included debt of USD 2.4 billion and 100% equity worth USD 3.6 billion in February 2007. The deal gave Hindalco the necessary diversification into downstream operations along with its existing upstream operations. Hindalco raised debt worth USD 2.8 billion and utilised USD 450 million from its cash reserves along with a non-recourse debt from banks and an indirect subsidiary bridge loan of USD 2.13 billion from AV Minerals Netherland to fund the all cash acquisition. The deal was viewed to be too costly for Hindalco taking into consideration the financial position of Novelis.
The debt equity ratio stands at 1.3 with a total debt of Rs.24,144 crores. Consolidated interest expenses increased from Rs.1758 crore to Rs.2079 crores in FY 2012 – 13 due to addition of new debt in the balance sheet. Novelis which was earlier in loss before the acquisition has shown recovery and has comeback to profitability with USD 241 million in net profit for FY 2012-13. The Sales to Debt ratio for FY 2012-13 is 3.32 and the Market Capitalization to Debt ratio is 0.92 for the company.
The stock price of Hindalco reached levels of Rs.40 after a few months from the time of the deal to recover back to levels of Rs.250 in 2011. The current price is Rs.116 per share and the book value per share is Rs.164.
A double digit growth rate of 11% in profits in Q1FY14 compared to Q1FY13 shows recovery for the company. The modest recovery in the US and European markets has also increased expectations of a continued recovery for the company and thus the servicing of debt would not be a long term concern for it.
Renuka Sugar’s Acquisition of Vale Do Ives
Renuka Sugars acquisition of the Brazilian company Vale Do Ives for a value of USD 240 million in 2010 was a move aimed at sourcing raw sugar for Indian facilities. There are restrictions on undertaking farming activity for sugar producing companies and therefore they are looking for opportunities in foreign countries from where they can source raw sugar for further processing. Renuka Sugars paid USD 82 million initially and the rest of the payment is planned to be made ahead in a period of 8 years. The company raised USD 105 million through Qualified Institutional Placement of shares.
The stock of Renuka Sugars is trading at Rs.15.10 and it made a 52 week low of Rs.14.50 recently. Flat sugar prices and a depreciating INR will continue to erode the profitability of the company. The company has a debt of Rs.8400 crores as on March 2013 and it has a dollar denominated debt of USD 468 million from its Brazilian subsidiaries. The high dollar denominated debt in the scenario of INR depreciation reduces profitability. The company reported a forex loss of Rs.87 crores in Q1FY14 and that is likely to increase in the remaining quarters of FY14 if the INR continues to depreciate further.