FINANCING OF M&A TRANSACTIONS The way forward…

Hemal Mehta 14 July 2012

The Contents of this document do not represent professional advice and is only for discussion purposes. Thus no reliance should be placed on the views so expressed.

Agenda

©2012 Deloitte Touche Tohmatsu India Private Limited

• M&A deals • Commonly used structures • Sources of finance • Case studies

M&A Deal

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M&A Deal

4

Tata Steel bought Corus Plc

USD 12.9 billion

Acquisition made Tata Steel world’s fifth largest steel producer globally

Hindalco acquired Novelis Inc.

USD 6 billion

Acquisition made Hindalco the world's largest aluminum rolling company

Suzlon Energy Ltd. acquired REpower

USD 1.6 billion

Acquisition made Suzlon world's third largest wind power company

United spirits acquired W&M

USD 0.5 billion

Acquisition made United Spirits world's second largest spirit company

JSW Steel acquired Ispat

INR 2140 crores

Acquisition of steel manufacturing company

Abbott acquired business from Piramal Healthcare

USD 3.7 billion

Acquisition of Healthcare Solution Business of Piramal Healthcare

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Key Drivers for an M&A Transaction

Global reach

Hedge against Forex Fluctuation &

Spreading of risks

Inorganic growth, expansion and diversification

Acquiring research & advanced technology

Commonly used structures

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Commonly used structures – Stock purchase

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Disadvantages May lead to open offers Potential capital gain tax liability Inability to cherry pick the assets

Shareholders Cash

Target Shares of Target Acquirer

Asset / Liabilities

Benefits Simple and easy to execute Minimal transaction cost Pricing benchmarks to be applied

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Commonly used structures – Asset purchase

Disadvantages Potential tax implications Potential stamp duty and sales tax cost Cash flow to the company and not the promoters / shareholders

Shareholders

Target Assets / Liabilities

Cash

Acquirer

Asset / Liabilities

Benefits Fairly quick to execute Ability to cherry pick the assets No open offers required to be made Could be slump sale or specific asset sale

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Commonly used structures – Merger

Shareholders

Shares Shareholders

Target Merge Acquirer

Asset / Liabilities

Benefits

Ability to consolidate operations into a single entity

Variants includes reverse merger and demerger

Disadvantages Time consuming – court process to be followed

Need approvals of stock exchange, lenders, shareholders

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Sources of financing

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Sources

Sources of finance

Internal External

• Deal moves faster • First mover advantage • No impact on

profitability • Lesser compliance

• Used to finance larger deals

• Availability of wide range of instruments

• Tax break on interest 11

Factors influencing M&A Financing

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• International debt market and India's country and corporate ratings

• Limitations in debt financing for domestic acquisition financing

• Equity markets in India and overseas

• FDI regulations

• Exchange Control

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Instruments

Equity Preference Shares Debentures / Bonds

• ADR / GDR • Capital raising in

overseas SPVs • Equity / convertible

instruments from Private Equity (PE)

• Raising of debt from domestic capital market

• Compulsorily convertible – FDI

• Optionally convertible – ECB

• Non-convertible – ECB

• Compulsorily convertible – FDI

• Optionally convertible – ECB

• Foreign Currency Exchangeable Bonds (FCEB)

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Equity, CCPS, CCD ~ treated as capital for FDI purpose

Criteria Equity shares CCD / CCPS

Treated as FDI FDI

Restriction No restriction subject to sector caps No restriction subject to sector caps

Pricing guidelines

Applicable Applicable

Repatriation of income thereon

Dividends on equity are freely repatriable Interest @ 300 basis points over State Bank of India’s Prime Lending Rate

Tax deductibility of income flows

Dividend not tax deductible Interest tax deductible (subject to arm’s length criteria)

Taxability of income streams

DDT @ 16.22% on net basis payable by Indian company

Withholding tax on interest payable depending upon the country to which interest is paid

Taxation on exit

Subject to capital gains tax unless investment is through a favorable tax treaty jurisdiction

Subject to capital gains tax unless investment is through a favorable tax treaty jurisdiction

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AIM

Why overseas listing?

Why AIM?

• Financially Mature Markets

• Diversification of Investor Base

• Access to Marketable Currency

• Heightened interest and positioning of the company

• Wider options for future financing

• Specifically tailored for smaller and younger companies seeking

growth capital

• Streamlined Regulatory Regime – more flexible than the main

market regulations

• Easier reporting & disclosure rules

• Less stringent requirements

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Leveraged Buyouts

• LBO is a strategy where a financial sponsor gains control of a majority of a target company’s equity through the use of borrowed money or debt

In an LBO, there is usually a ratio of 70% debt to 30% equity

• Allows companies to make large acquisitions without having to commit a lot of capital

• In LBO, assets of the acquired company act as collateral for the debt and principal

obligations are met through cash flows of the refinanced company

Case Studies

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Case Study 1 – Availability of funds for lease of land (1/2)

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Mechanics Cash flow for

P Ltd

Cash flow for R Ltd

Cash flow for M Ltd

P Ltd infuses Rs. 43.5 crore R Ltd, an Indian entity set up by Indian individuals, as first tranche of investments

(43.5) 43.5 -

R Ltd will utilize the funds received (i.e. Rs. 43.5 crore) to make an advance to M Ltd for sub-lease of land

- (43.5) 43.5

As a security for advance, Promoter to pledge liquid assets / other projects (FDI compliant) in favour of R Ltd (assets for pledge to be finalized)

- - -

Net Cash Flow (43.5) - 43.5

P Ltd

Rs. 43.5 crore as share application money

Mauritius /

Cyprus

Pledge of Liquid Assets / Projects

India

R Ltd M Ltd Promoter 100%

Proposed Sub- Lease of Land

Master Lease

of Land

P Ltd designated

shareholders

Government Authorities

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Case Study 1 – Availability of funds for lease of land (2/2)

Mechanics Cash flow for P Ltd

Cash flow for R Ltd

Cash flow for M Ltd

Opening Cash Flows (43.5) - 43.5

M Ltd will utilize the total cash corpus for meeting registrations costs of the land lease

- - (43.5)

Once the registration is completed, M Ltd will execute the sub-lease agreement with R Ltd

- - -

P Ltd will infuse the balance commitment of Rs. 16.5 crore (16.5) 16.5

R Ltd will utilize its fresh infusion to make payment of balance tranche of land consideration (Rs. 16.5 crore) to M Ltd

(16.5) 16.5

Shareholders of R Ltd will transfer shares to P Ltd and Promoter and allot shares to P Ltd for the application money, in such a way that post transfer and issue, the shareholding between P Ltd and Promoter is 27:73

- - -

Closing Cash Flows (60) Nil 16.5

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Case Study 2 – Merger

Shareholders

1. a Approvals from BVI Court

ABC, BVI 3. Dissolution without winding up

1. b Approval from Mauritius

High Court

100%

ABC Mauritius

3. Dissolution without winding up

1. c Approvals from Indian High

Court for merger

75%

ABC India

25%

Public

2. Issue of shares

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Case Study 3 – Special Purpose Acquisition Company (SPAC)

Push down of funds – equity / debt

SPAC Background

• SPAC is a collective investment scheme that allows

stock market investors to invest in a private equity

type transactions

• SPACs generally are shell companies but such

Transfer of

Mauritius Co.

Indian Co

companies go public with the intention of acquiring a company with the proceeds of the SPAC’s IPO funds

Mechanics • SPAC was incorporated and listed on the AIM

• SPAC in turn incorporated a wholly owned subsidiary

company in Mauritius

• From the proceeds of the IPO of the SPAC, M Co.

acquires shares of an Indian company from its shares of Indian Co

Shareholders

shareholders • FIPB approval obtained for swap of shares of the

SPAC

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Case Study 4 – Debt push down

Company A

Company B

Background • Company A incorporated wholly owned subsidiary

company in Mauritius, M Co

Merge

Equity Debt

Mauritius Co.

100%

I Co

• Equity capital - $ 100 • M Co incorporates a wholly owned subsidiary

company in India, I Co.

• Company B, a company held by the same

shareholder as Company A, funds M Co by way of

overseas debt

Mechanics • M Co was merged into I Co

• Debt vests in the I Co

• I Co to service the debt

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Case Study 5 – Multilayered fund raising

List Co

Equity

M Co

Equity

NA Co

Equity

Netherland Co

Debt and Equity

Target Co

PE Investor Equity

UK Bank

Debt

Background • List Co and PE Investor proposed to acquire a company, Target

Co • Netherland being the most tax efficient jurisdiction, shares of the

Target Co was to be held by Netherland Co. • Due to regulatory restrictions, PE Investor could not infuse funds

into any company incorporated in Netherland

• Further, a company incorporated in Netherland could not be

merged into any other overseas company

Mechanics • List Co incorporated a company in Mauritius, M Co and funded

the same by way of equity capital along with the PE Investor

• M Co incorporated a subsidiary company in Netherland Antilles

(NA Co.) • M Co pushed the funds down into NA Co as equity which in turn

was infused into the Netherland Co

• Debt was raised by the Netherland Co from a UK Bank • Netherland Co infused the funds as equity and debt into the

Target Co

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Case Study 6 – Fund raising through AIM Listing

UNITECH Corporate Parks Plc

100%

Candor Investments Limited

100%

Investment Management Agreement

Overseas

Nectrus Limited (Cyprus)

Tulipa Investments

Inc.

Gladiolys

Realty Inc.

Acacia Properties

Inc.

Dottertel

Estates Inc.

Sparrow Properties

Inc.

Myna Holdings Inc.

Mauritius

60% Investment by Mauritius SPVs and remaining 40% by Unitech affiliates

UNITECH Affiliates (India)

India

Unitech Realty Projects Limited

Unitech Developers and Projects Limited

Shantiniketan Properties

Limited

Seaview Developers

Limited

Unitech Infra-con Limited

Unitech Hi-Tech Structures

Limited

Minority Interest

Projects

InfoSpace Gurgaon G1 - ITC

InfoSpace Gurgaon G2 - IST

InfoSpace Noida N1

InfoSpace Noida N2

InfoSpace Noida N3

InfoSpace Kolkata

K1

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Case Study 7 – Typical fund structures (1/3)

Overseas fund structure

Sponsor Investors Across the world

Feeder Fund (if required)

Suitable overseas jurisdiction

Overseas manager

Advisory services

Management services

Subject to pricing guidelines (DCF method)

Fund

IHC / FVCI

Investments

No pricing guidelines apply

India

Indian advisor

Portfolio Company 1

Portfolio Company 2

Portfolio Company 3

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Case Study 7 – Typical fund structures (2/3)

Overseas fund structure (with domestic co-investment)

Overseas sponsor

Investors Across the world

Feeder Fund (if required)

Suitable overseas jurisdiction

Overseas manager

Management services

Co-investment

Fund

Advisory services

Agreement

Subject to pricing guidelines (DCF method)

IHC / FVCI

Investments

No pricing guidelines apply

India

Indian advisor

Management services

VCF

Portfolio Company 1

Portfolio Company 2

Portfolio Company 3

Domestic sponsor, if any

Domestic investors

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Case Study 7 – Typical fund structures (3/3)

Unified fund structure Overseas sponsor

Investors

Across the world

Suitable Overseas Jurisdiction

Fund (FVCI)

Indian Manager

Management services

VCF

Domestic sponsor

Domestic investors

India

Portfolio Company 1

Portfolio Company 2

Portfolio Company 3

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Case Study 8 – Singapore Listing – Business Trust (1/3)

Sponsor Investors

Singapore

India

Property

Mgmt Co.

Management &

Performance Fee

Project Co 1

Business

Trust

SPV

Project Co 2

FDI compliant

Key considerations

• Flexibility to invest in construction development projects and stabilized assets

• Taxable entity (no pass through status for Singapore tax purposes)

• No restrictions on income distribution

• No restrictions on gearing

Mgmt Co

Property Management

Fees

Properties

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Case Study 8 – Singapore Listing – REIT (2/3)

Sponsor Investors

Singapore

India

Mgmt Co.

Management &

Performance Fee

Asset Co 1

REIT SPV

Asset Co 2

Key considerations

• 90% investments in stabilized assets and only 10% in construction development projects

• Pass through entity for Singapore tax purposes

• 90% of income to distributed to investors

Property Mgmt Co

Property Management

Fees

FDI compliant Properties

• Gearing ability linked to credit rating

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Case Study 8 – Singapore Listing – Stapled Trust (3/3)

Sponsor Investors

Business Trust

Transfer of shares of SPV after development of asset

REIT

During development phase

SPV

Post stabilization of asset

Singapore

India

Co 1 Co 2

FDI compliant

Properties

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Case Study 9 – Vedanta – Cairn

Funding $bn

Sesa Goa

Own resources 2.88

Vendanta Resources

Senior Secured Bank Term Loan – Tranche A (18 months)

1.47

Senior Secured Bank Term Loan – Tranche B (36 months)

1.31

Bonds (Maturing 2016 and 2021) 1.65

Own Cash 1.36

Total 5.79

• Vedanta acquired 58.5% of Cairn India Ltd. for a total consideration of $8.67bn

• 38.5% stake held by Vedanta plc and 20% stake held by Sesa Goa

• Acquisition funded c. 50% from own resources and balance c. 50% from acquisition debt

Vedanta resources

55.1% 38.8%

20.1% Sesa Goa Cairn India

Consideration $bn

20.1% stake acquired by Sesa Goa 2.88

38.8% stake acquired by Vedanta Resources 5.79

Total consideration 8.67

Source: Vendanta Resources Investor Presentation

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Case Study 10 – Tata – Corus deal (1/2)

Equity of $4.1 bn

Tata Steel

India

Rationale

• Combined entity to become one of the largest producer of steel

Equity of $4.1 bn, Quassi equity of $1.25 bn & Bridge loan of $ 1.41 bn

Acquired Corus out of $6.76 bn received from SPVs & long term debt of $6.14 bn from consortium of banks

100%

Singapore Co

100%

UK Co 1

100%

UK Co 2 100%

UK Co 3

100%

Tata Steel UK

Corus

Debt Debt Debt Debt

• Would have taken several years for Tatas to build an enterprise

of a size of Corus

• Merger would also provide significant presence in Europe Methodology

• SPV’s were floated in UK under the name Tata Steel UK. Tulip

Holdings (1,2,3) which were ultimately held by a Singapore

SPV

• Tata Steel along with the SPV’s incorporated in Singapore and

UK raised the requisite debt of USD 8.8 bn constituting 68% of

the total acquisition value of USD 12.94 bn. The entire debt is

proposed to be pushed in each subsequent subsidiary and

ultimately in Corus.

• Following loan facilities were used for financing the acquisition:

Bridge Facility;

Term Loan;

Revolving credit facility;

Mezzanine facility;

Junk Bonds

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Case Study 10 – Tata – Corus deal (2/2)

• Tata Steel acquired CORUS plc. for $12.94 bn Equity Contribution of $ 4.14 bn; and

Borrowings of $8.80 bn through subsidiaries

• Tax consolidation in UK, tax shield on interest available to Corus

• Possible merger of Tata Steel UK with Corus

Corus can pay loan out of its own cash flows and it will eliminate the tax to be paid on the

dividend received from Corus

Objective

Optimizing Costs • To minimize the financing cost • To minimize transaction cost like due diligence, legal cost, etc • To minimise future costs like prepayment penalties, commitment

charges, penal interest

Structuring the Transaction most appropriately

• To finalize the best suitable financing instrument and provide the most appropriate security

• To choose the best suitable jurisdiction and most optimal borrowing vehicle

• To negotiate the financial covenants/ other restrictive covenants • To structure the repayment schedule as per the sash flow • To minimize the various kind of tax (Withholding, Dividend Distribution,

Income Tax etc.)

Finding the most suitable Lender

• To decide the most suitable Lender from a long term perspective • Whether to go for a Bilateral loan or Syndicated loan

Timely completion of the Transaction / Synchronize the entire process

• To complete the Transaction in a short time, especially when there are multiple bidders for the Target

• To coordinate across different geographies, lenders and various advisors