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
©2012 Deloitte Touche Tohmatsu India Private Limited
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
©2012 Deloitte Touche Tohmatsu India Private Limited
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