Sources of Financing, Financing options & Structures, etc.

Mergers & Acquisitions – The Integration ProcessD&B M&A Series 2008

New DelhiA t 28th 2008August 28th, 2008

Pankaj KarnaPankaj KarnaPartner and Head- M&AGrant Thornton-India

Outline

• The M&A Financing Environment

• M&A Financing Options & Structures

• Key Challenges

• Grant Thornton

The M&A Financing EnvironmentThe M&A Financing Environment

The M&A Environment

ActivityM&A Trends

32.8

253035

ns

M&A Trends

Domestic, Outbound & InboundSector(For H1 2008)

No. of Deals

Amount (USD Mn)

Pharma, Healthcare Biotech 28 3172IT & ITES 62 646

5 2.9 4.35.4

15.5

4.79.9 8.5

05

1015205

2006 2007 2008 (J J )

in U

S $B

illion

& S 6 6 6Automotive 9 2390Power & Energy 6 2245Telecom 12 847Banking and Fin. Service 10 572

2006 2007 2008 (Jan-Jun)

Domestic Inbound Outbound

gMedia & Entertainment 23 572

Major Outbound M&A Deals: H1 2008

Acquirer Target Value

Source: Grant Thornton Deal Tracker

Acquirer Target Value

Tata Motors Jaguar & Land Rover USD 2.3 Bn

GMR Infrastructure InterGen N.V USD 1.1 Bn

Great Offshore SeaDragon Offshore USD 1.4 Bn

Continued outbound momentum, although overall the year has seen some moderation

Tata Chemicals General Chemical Indl. Products Ltd. USD 1.0 Bn

Jubilant Organosys Draxis Health Inc USD 255 Mn

The M&A Environment

Domestic CapitalE i Snapshot of Indian IPOsEquity• The total capital mobilized through IPO for the

H1 2008 is USD 4.07 Bn compared to USD 7.68 Bn in H1 2007.

Snapshot of Indian IPOsYear No. of

IPOsAmt. (in USD Mn.)

Avg. IPO size (in USD Mn)

2005 64 5521 50 86 27

• H1 2008 also saw a significant skew owing to the Reliance Power IPO, and volumes are down by almost 85% as compared to last year in Q2 2008

2005 64 5521.50 86.27

2006 91 5889.38 64.72

2007 101 9920.65 98.22

Jan-Jun 08 29 4065.65 140.15year in Q2 2008.

Debt• Gross bank credit stood at INR 24,476 Bn in

Mar 2008 (22% growth over Mar 2007) Gross Bank Credit (For Industry Only) 6973

7000

8000

Source: Grant Thornton Deal Tracker

Total 285 25397.18 89.11

however, remained flat expected INR 24,776 in Jun 2008.

• Interest rates continue to tighten, with inflation background, making rupee debt much costlier 2188 2295

2956 3131

4231

5504

3000

4000

5000

6000

7000

In IN

R b

n

background, making rupee debt much costlier than 2007.

General slowdown across domestic sources of capital raising

2188 2295

0

1000

2000

2001 2002 2003 2004 2005 2006 2007Source: Indiastat

The M&A Environment

International CapitalECB & ADR/GDR i i V l• In FY08, India's FDI touched USD 25 Bn, up

56% from USD 15.7 Bn in FY07. Q1 FY09 has seen over USD 10 Bn of FDI flow into India.

• Total of USD 7 1 Bn of private equity deals

ECB & ADR/GDR issues in Value

25345

53406

40000

50000

60000

USD

Mn.

• Total of USD 7.1 Bn of private equity dealsoccurred in the first 6 months of CY08growing by 4.82% over the first half of CY07 (USD 6.82 Bn).Si ifi t i i ECB' /I t ti l D bt

8546613

13451

2552

25345

30508800

0

10000

20000

30000

ECB ADR/GDR

Amou

nt in

U

FY 05 FY06 FY 07 FY 08Source: RBI• Significant increase in ECB's/International Debt and GDR's

• USD 7.7Bn was raised through FCCBs in 2007, whereas USD 1 Bn has been raised in

19,030

14,000

16,000

18,000

20,000

mill

PE Deals in Value FY 05 FY06 FY 07 FY 08Source: RBI

H1 2008.• In CY 07 9 India centric companies raised

USD 846 Mn from the AIM Market. • 22 India Focused Firms already listed on

2,000

7,9007,100

2,000

4,000

6,000

8,000

10,000

12,000

Am

ount

in U

SD m

• 22 India Focused Firms already listed on AIM and 10-12 firms expected this year.

International capital raising/ capital flows more stable than domestic sources

0CY05 CY06 CY07 CY08 (First Half)

Private Equity DealsSource: Grant Thornton Deal Tracker

The M&A Environment

Factors Influencing M&A Financing

• The India opportunity-whichever way you look it!

– Opportunity for Indian companies to unlock value by combining with offshore presence

– Growing domestic market and consolidation opportunities

• International Debt market and India's country and corporate ratingsy p g

• Limitations in debt financing for domestic acquisition financing

• Equity markets in India and Overseas

• FDI regulations

• Exchange Control

The India opportunity has unlocked financing creativity and encouraged risk participation for acquisition financing

M&A Financing

Options & StructuresOptions & Structures

M&A Financing Options & Structures

InstrumentsGDR/ADR or Offshore Capital Raising

Equity

GDR/ADR or Offshore Capital Raising in SPV/ Overseas subsidiary

Equity or convertible instruments from Private Equity players

Growth Markets

P/E

Compulsorily Convertible FDI

Capital Raising from domestic capital markets Domestic Markets

Preference Shares Optionally Convertible

Non-convertible

ECB

ECB

Debentures/ Bonds

Compulsorily Convertible

Non/ Optionally Convertible/Debt

FDI

ECB/Dom Debt

Choice of Capital Raise Instrument dependent on deal scenario

Foreign Currency Exchangeable Bonds FDI

M&A Financing Options & Structures

Alternate Investment Market ('AIM')

C ti f t l

AIM Market was set up in 1995 by the London Stock Exchange (“LSE”) as an international market for smaller/ growing companies seeking new capital for growth and expansion

Creation of an external market in the

company's shares

AIM Ready access to long Flexible Regulatory AIM y gterm investment

capital

Flexible Regulatory Framework

Increasing Investor Interest in India story and emerging Indian corporate in the Global market, have made AIM an attractive capital raising option

M&A Financing Options & Structures

Growth Markets: AIM vs. Indian IPO

AIM IPOMarket Orientation Growing Companies Mature Companies

Regulator LSE framework – NOMAD SEBIRegulator plays Key Role SEBI

Requirements

• FDI compliant• Not past Track Record• Projects generating future

• Norms for Min paid-up capital/ net worth/ 3-yr track recordMax amount can be raised in an yearojects ge e at g utu e

revenues• Max amount can be raised in an year

Time for Processing 14 weeks 12 to 14 weeks subject to regulatory clearances

Follow-on capitalFollow-on capital raising Quicker and cost effective Time and effort intensive

Listings Management NOMAD/Broker stays on Lead manager only during IPO process

Visibility High visibility among UK and E I t Limited international visibility

AIM well positioned for SPV fund raising or growth oriented situations

Visibility European Investors Limited international visibility

M&A Financing Options & Structures

India focused AIM Issuances

AIM Listed EntityAmount

raised Timing

Indian Hospitality Corp USD 100Mn Aug-06

• Spate of real-estate issuances happened in the second-half of CY06.

HIRCO PLC GBP 383 Mn Dec-06

UNITECH Corporate Parks PLC GBP 360 Mn Dec-06

Kubera Cross-Border Fund Ltd USD 206 Mn Dec-06

• Several media issuances in second-half of CY07.

Si ifi t /The India Film Company GBP 55 Mn Jun-07

UTV Motion Pictures Plc USD 70Mn Jul-07

India Media Plc USD 150Mn Q3-2007

• Significant power/ energy issuances

• Always room for issues with a d b i hil h India Media Plc USD 150Mn Q3 2007

Mortice Ltd. USD 9 Mn May-08

OPG Power Ventures Plc USD 118 Mn May-08

KSK Emerging India Energy Ltd USD 387 Mn Jun - 08

sound business philosophy e.g. Kubera

KSK Emerging India Energy Ltd USD 387 Mn Jun 08

Indus Energy Plc USD 46.3 Mn Jun - 08

Growth sectors, SPAC's, Natural resources and project funding have fared well at AIM

M&A Financing Options & Structures

Basic Approaches

• Debt within capital market exposure norms for banks and for asset purchase

SemanticSpace, a leading Indian IT company backed by UTI venture fund and New Vernon, acquired Prolifics (US) for USD 40 Mn in July 08 in an all cash deal was funded by internal accruals and debtp

• ECB's - offshore acquisitions

was funded by internal accruals and debt.

Nirma Ltd (India), a leading detergent manufacturing, acquired Searles Valley Mi l (US) f d d h h ECB iacquisitions

• Private Equity

Minerals (US) funded through ECB issuesof USD 20 Mn maturing in 6 years as of June 08

• Domestic follow-on/ rights issues

Hindalco Ind. (India) in June 08 has opted for a rights issue to pay bridge loan used to acquire Novelis. The rights issue has a 1:3 ratio and up to USD 1.1 Bn is to be raised

Leveraging the balance sheet or plain vanilla equity raise (private/public) continue to be the most commonly form of capital raise by Indian companies

to fund acquisitions

M&A Financing Options & Structures

Partnering with FI's/ PE

Financial InstitutionsIFGL Refractories (India) Acquisition of

Hofmann Ceramic (Germany) for € 7 Mn through a SPV; Funded by loan of

IFGL Refractories (India) Acquisition of Hofmann Ceramic (Germany) for € 7 Mn through a SPV; Funded by loan of

DebtMn through a SPV; Funded by loan of

€5.3 Mn from HSBC in Jul 08Mn through a SPV; Funded by loan of

€5.3 Mn from HSBC in Jul 08

Target firmCompany SPVEquity Acquire

P i t E it

Partnership Mahindra & Mahindra (India) and ICICI Venture Funds consortium acquired

Italian gear manufacturer Metalcastello in

Mahindra & Mahindra (India) and ICICI Venture Funds consortium acquired

Italian gear manufacturer Metalcastello inPrivate Equity Italian gear manufacturer Metalcastello in Apr 08 with a bid of €105 million

Italian gear manufacturer Metalcastello in Apr 08 with a bid of €105 million

M&A Financing Options & Structures

The Tata Tetley Case study:

Leveraged BuyoutThe Tata-Tetley Case-study:• In 2000 Tata acquired Tetley UK for £271 Mn• First ever LBO by an Indian company• Tata's net worth of USD 114 Mn was one-fourth

TETLEY ACQUISITIONSOURCES OF FUNDS GBP Mn

EquityTata Tea GDR 45Tata s net worth of USD 114 Mn was one fourth

of Tetley's market value (USD 450 Mn)• Post integration, today, the market shares of

Tetley has increased from 22 to 28% in UK and 32 t 44% i C d

Tata Tea GDR 45

Tata Tea internal accruals 15

Tata Tea Inc. U.S. 10

Total 7032 to 44% in Canada

• Tata benefited from being a pure commodity business to a strong global brand play

DebtSenior debt 131

Mezz debt/loan stock 50

Vendor loan 20Tata-Corus Vendor loan 20

Total debt 201

Total Acquisition funding 271

Senior debt (future commitment) 34

• Tata's offered 608 pence per share and won after 9 rounds of bidding pegging Corus’ EV at more than USD 13 Bn

• USD 8 5 Bn raised through a LBO structure via Total 305• USD 8.5 Bn raised through a LBO structure via the UK based SPV, Tata Steel UKLBO's are an effective tool in consolidating asset rich and cash flow stable targets of

much larger scale than acquirer

M&A Financing Options & Structures

Using SPAC on AIM

Equity Capital Raising

InvestmentCompany

Subsidiary

Acquire/ Stake Purchase

Target firmEntity on AIMRaising

CompanyPromoter holding

Indian Hospitality Corp (IHC) is a typical

Kubera is a fund construct that raised USD 200 Mn to make investments/ acquire

stake in companies benefiting from the India outsourcing story.Indian Hospitality Corp (IHC) is a typical

AIM listed SPAC that raised USD 100 Mn to make targeted acquisitions on hospitality, leisure, tourism and travel related businesses in India

Kubera Investments Amount (USD Mn.)

18th Jun 08 Essel Shyam 22businesses in India.IHC acquired Mars in Jun 2007 followed by Sky Gourmet

30th Jan 08 GSS America 10

21st Dec 07 Specialized Auto Comp. 21

17th Dec 07 Ocimum Biosolutions 17

M&A Financing Options & Structures

Case Study: Tata Motors and Jaguar – Land RoverPLAN A Th I iti l St t

• Tata Motors raised about USD 2.3 Bn for the acquisitions Particulars

Amount (in INR Crores)

Total Value : 9770Equity Shares 2200

PLAN A: The Initial Strategy

• Took a bridge loan from a consortium of banks to finance the initial costs of the acquisition

Equity Shares 2200A' Equity Shares 2000Issue of 0.5 % Five year Convertible prefrence shares, convertible to 'A' equity shares between 3 to 5 years

3000

• Considering the current volatility in markets the board recently came out with an alternate plan to restrict the Rights

between 3 to 5 yearsFrom Overseas Markets 2569

ParticularsAmount (in INR Crores)

PLAN B: The Current Strategyp g

Issue and instead monetize a part of company investments through phased divestments over 6 to 8 months

Particulars (in INR Crores)Total Value : 9770Equity Shares 2200A' Equity Shares 2000Asset Sale which includes possible divestment of stake in Tata Steel worth INR 2000 Crores

3000

From Overseas Markets 2569

Market environment is key, and contingency plans important especially in large value

transactions

M&A Financing Options & Structures

Case Study: WNS Holdings – Aviva Global Services

• WNS a Mumbai based BPO, is 51% controlled by Warburg Pincus AVIVA ACQUISITION

SOURCES OF FUNDS USD Mn

C dit f ICICI B k 200• WNS raised about USD 230 Mn for the

acquisition in July 2008

Credit from ICICI Bank 200

Equity contribution (Warburg Pincus) 30

• Took credit from ICICI as well as equity contribution from Warburg to fund the acquisition

Largest buyout of a foreign• WNS was able to secure Aviva's USD 1

Bn outsourced work for the next eight years, with part being sub-contracted to EXL and 24/7 Customer

Largest buyout of a foreign captive BPO in India – backing of

fund and debt support

EXL and 24/7 Customer

Challenges in Capital Raising/ M&A Financing

Challenges

• Reclassification of Optionally convertible instruments-limits the mezzanine/ quasi equity foreign capital

Increasing trend of foreign debt being structured to build in flexibility– Increasing trend of foreign debt being structured to build in flexibility

– Compulsory convertible debentures/ preference shares

• Domestic acquisition financing from Banks

• International debt financing - context of current sub prime crisis and market impact therein

• Listing of unlisted companies overseas/ dual listings

• Current stock market conditions vs valuation expectations• Current stock market conditions vs. valuation expectations

• FCCB's - End-use/ pricing regulations

• ECB's-End use restrictions

Challenges

Bridging the gap-Convertible Instruments

Compulsory Convertible Instrument

• Fall outside the ECB guidelines– Coupon rate linked to SBI PLR + 300 basis points (Investors prefer this option as it

offer a bigger window than ECB)– Funds can be utilized for working capital requirement (flexibility in fund deployment)

• Conversion at a predetermined formula– EBITDA / PAT linked (Ratchet)

• Structures around 'Put options' for downside protectionE i bl i t th– Exercisable against the sponsors

– Minimum IRR (Payment of interest + Payment for acquired converted equity shares)• With immediate dilution in current environment a concern area, this bridges the gap. Also

often benefits of M&A are in medium and long term which can be taken into account byoften benefits of M&A are in medium and long term, which can be taken into account by conversion in the future.

Most preferred option to prevent immediate stake dilution

Challenges

Exchangeable Bonds-could be another optionForeign Currency Exchangeable Bonds (FCEB)

Proposed Guidelines for issuance of Exchangeable Bonds by an Indian Company

• Option to exchange the bond for stock of a company other than the issuer (usually a subsidiary) at some prescribed conditions. Diff t f tibl b d hi h

• Listed firms allowed to raise funds overseas through issue of FCEB's

Different from a convertible bond, which gives the option to exchange the bond for other securities (usually stock) offered by the issuer.

• A company may issue these bonds only to foreign investors but the repayment could be made through offering equity in any firm within its group

• Typically mature in three to six years and is yet to be approved by RBI

• The firms issuing FCEBs should be operating in sectors where the government allows foreign direct investment orallows foreign direct investment or overseas borrowing

Unlock value from different businesses of the same company

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Appendices

Appendix

Growth Markets: A comparison

AIM GEM NASDAQ CM SESDAQMin Public Float

None 100 or 300 shareholders

300 shareholders

500 shareholders

Mi I iti l N N USD 5M NMin Initial Equity

None None USD 5Mn None

Min Mkt Cap None USD 5.9 Mn or USD 64 Mn

USD 5 Mn None

Trading History

None 12 or 24 months

12 months None for researched & costed project

Profitability None None None As above

Accounting Standards

UK or US GAAP/IFRS

HK or US GAAP/IFRS

US GAAP Sing FRS/US GAAP/IFRS

Reporting Language

English English & Chinese

English Englishg g

AIM is the most attractive from a start up/growth company perspective

Options-Capital Raising

GDR/ ADR's

• Guidelines:– FDI Policy/ SEBI Regulations– Listing country guidelines

Recent Issues

• Accentia Technologies: Listed USD 20 Mn worth of GDR at Rs. 10 per share on the Singapore exchange It has already

• Key Terms:– No end-use restrictions on issue

proceeds, except real estate and

the Singapore exchange. It has already acquired two HRCM companies in US and in process of acquiring 3 others in India

• BSEL Infra Realty : Raised USD 35.30 Mn p , pstock markets

– No limit on amount that can be raised

• Taxation Issues:

yvia GDR issue as of Jan 08

• IndusInd Bank: Raised USD 51.73 Mn through GDRs as of Jun 08, listed on the Luxembourg Stock ExchangeTaxation Issues:

– Tax on Dividend payments – No tax on transactions outside India

(listing domicile applicability)

Luxembourg Stock Exchange

• Indiabulls Real Estate Ltd: Raised USD 400 Mn in Jul 2007, listed on the L b St k E hLuxembourg Stock Exchange.

GDR/ ADR's offer an option to listed companies to tap overseas equity markets however, cost-time implications

Options-Capital Raising

FCCB’s

• End use:– Investment Purposes like imports– Overseas direct investment

Acquisition of shares in divestment

Recent Issues

• Aban offshore raised USD 200 Mn for overseas acquisition in Apr 2008 with a– Acquisition of shares in divestment

process

• Key Terms:– Maturity: Minimum 3/ 5 yrs depending

overseas acquisition in Apr 2008 with a maturity of 5 years.

• Sintex Industries launched an Issues of USD 300 Mn for import of capital goodsMaturity: Minimum 3/ 5 yrs depending

upon amount of raise– Cost: 200-350 bps over 6mth LIBOR

depending upon maturity

USD 300 Mn for import of capital goods and overseas investments in Feb 2008 with a maturity of 5 years.

• Wockhardt raised USD 100 Mn for• Taxation Issues:– Withholding Tax on Interest – Tax on Dividend payments– Capital Gains Tax (on converted equity

t l )

Wockhardt raised USD 100 Mn for expansion into the European market in Sep 2004 maturity in Sep'09 and yield of 5.25% semi annual

at sale)– No tax on transfers outside India

FCCB's offer a low cost option to listed companies for raising capital without

immediate equity dilution

Thank You

Pankaj Karna I Partner & Head, Mergers & AcquisitionsGrant Thornton | L 41 Connaught Circus, New Delhi 110 001, IndiaM +91 98100 34213 | T 91 11 4278 7046 | F 91 11 4278 7071 | E Pankaj.Karna@wcgt.in | W http://www.wcgt.in