India Inc may have to wait a while before concluding a cross-border acquisition as big as the Tata-Corus deal. Leveraged buyouts, which helped Indian companies to raise finances for global takeovers, are heading for a slowdown, triggering sale of equities in global markets.
In a leveraged buyout the acquisition of a company is financed significantly by money borrowed against its assets. Leveraged buyouts thus allow companies to make large acquisitions without having to commit a lot of capital.
The Tatas managed to raise debt worth $6 billion--six times the earnings before tax, interest and depreciation (EBIDTA) of Corus--to finance the acquisition. But they may have to take another fund-raising route if they chose to acquire Land Rover and Jaguar from Ford. A liquidity crunch has forced global lenders to significantly scale down loans to 3-4 times the EBIDTA of the acquired company.
“Yes, the leverage of cross-border multiples is coming down,” said K Balakrishan, managing director, Lazard India. Lenders are also charging more for financing because they feel problems relating to the shaky sub-prime mortgages in the US could lead to a series of other problems.
Automobile maker Daimler’s attempt to sell its Chrysler unit to private equity fund Crebrus Capital has hit a roadblock due to the current credit squeeze. “It is a fact that credit for high-yield debt is tight. Therefore, lending rates will no longer be as fine as they used to be. There will be a short-term impact on leveraged buyouts," said Sangameswaran Manikan, director (investment banking), ABN Amro Asia Pacific.
However, this scenario might not impact transactions that are already over. The financing for large deals like the UB group’s acquisition of White & Mackay has already been completed. “We will not be affected by fluctuations in interest rates for leveraged buyouts," said Ravi Nedungadi, president, UB group.
Investment bankers feel leveraged buyouts will spring back by September. If, however, the situation persists, Indian companies may have to look for alternatives to stay in the acquisitions game. “Companies will then have to leverage the strength of their balance sheets,” said a Mumbai-based investment banker.