Ratan Tata's grabbing of Anglo-Dutch steelmaker Corus Group with an audacious bid price of $12.1 billion stunned the global industry, but quietly behind the guts and the glory, the Tata group chairman and his team stitched up some financial dealings that makes the deal possible, and affordable.
The 608 pence per share bid was finally made possible by financial engineering and Tata Steel's new alliance would now rank fifth in the world. Informed sources said the details are still fluid, but the deal is expected to be funded with a debt-equity ratio of 60:40.
In a leveraged buyout, Tata Steel will use the balance sheet of Corus to raise a debt of over $8 billion to fund the transaction, much like middle-class owners mortgage the apartment they buy to convert their rents into payback installments.
The deal will be paid for by Tata Steel UK, a special purpose vehicle (SPV) set up for the purpose. This SPV will get funds from Tata Steel routed through a Singapore subsidiary.
Group holding company Tata Sons Ltd will invest $1 billion for preference shares in Tata Steel, which would add an equal amount of its own and invest the $2 billion as equity in Tata Steel Asia Holding Pte Ltd, a Singapore-based wholly owned subsidiary.
Tata Steel Asia Holding Pte Ltd will then raise a debt of around $2 billon and invest the entire amount of $4 billion in Tata Steel UK, the SPV.
Tata Steel UK will then raise a debt of $ 8.1 billion in the European market from Deutsche Bank, ABN Amro Bank and other banks to create its chest of $12.1 billion, a key official involved in the deal said. This would be paid back by future incomes of Corus.
Going forward, Tatas are also expected to restructure some of Corus's business units. According to insiders, Tata Steel may hive off some of its non-core businesses to raise resources to pay off part of the debt raised by the SPV.
Tata Sons could not invest through the equity route as it had already exhausted the creeping acquisition limit of 5 per cent under stock market regulations.
In case Tata Sons invests its $1 billion through the equity route and subscribes to fresh equity, it will have to give an open offer to the public for the 20 per cent stake at current market prices, which would cost an additional $1.3 billion to Tata Sons at current market prices.