"M and As turn sour for India Inc"

The tide seems to be turning for corporate India on the overseas acquisition front.

After a string of foreign deals in the last few years, including Tata Motors' purchase of Land Rover and Jaguar brands from Ford for $2.3 billion this year, attempts by Indian companies to acquire assets abroad are increasingly hitting roadblocks. At least, the recent attempts by Indian companies suggest so.

Be that of Essar Steel's attempts to buy US steel firm Esmark for $1.2 billion (over Rs 4,500 crore), Sun Pharmaceutical's onging bid for Israeli firm Taro Pharmaceutical or Sterlite Industries' bid for Asarco's mining assets, the overtures by Indian companies have failed to hit the target.

Last week, Taro withdrew from its $454-million merger agreement with Sun, citing differences on pricing and the financial turnaround Taro achieved since last year. In the case of Sterlite, the former parent of Asarco, Grupo Mexico, has submitted a bid for the company's assets after the Indian company was shortlisted as the preferred bidder.

"The deals are being done in mature markets, where firms have to deal with the law of the land, bankruptcy process, unions, or aggressive bidders. It is upsetting when there's a counter-offer at a later stage like Grupo Mexico's bid for Asarco,'' said Sanjeev Kishan, director, PricewaterhouseCoopers.

Unlike in India, where a buyer can deal with a promoter having significant stake, the target companies in the West are widely-held and board-driven companies.

The board of directors have to ensure the best deal for the shareholders, and hence, insist on a "fiduciary out" clause in deals, which says that if the market conditions change (turnaround/if someone offers a higher price), it has the right of the company to back out.

"Until a deal is done and you have paid-off the shareholders, it is not done. Some of these deals have run into this problem," said Raj Balakrishnan, director, Merrill Lynch.

Though Essar's bid had the support of Esmark's management, the US steel company had to back Russian company Severstal's bid, which was higher than Essar's by just 25 cents per share and had the support of the workers' unions.

Essar, which revised its offer for Esmark upwards from $17 to $19 per share after the Russian steel-maker jumped the fray, didn't want to stretch it beyond a price.

"Given the macro-economic situation, it didn't want to go beyond a price. Its room beyond $19 was limited,'' said a banker. "It's a sign of maturity; that companies are not letting their ego drive them into a bidding war,'' said Balakrishnan, which brings us to a key question: are Indian companies being less aggressive on pricing their overseas targets?

"Companies are choosing to maintain liquidity; the aggression has plateaued,'' said Gaurav Khungar, executive director, (corporate finance), KPMG, a consulting firm.

"The cost of funding has gone up, which means a greater value is going to the lenders and lesser to equity,'' added Merrill Lynch's Balakrishnan.

The 39-per cent fall in the stock markets since January 9 this year and the fall in stock values of Indian companies has affected their leverage and ability to fund M&As. Unlike in India, where lending is collateral-based, internationally debt is given on the back of a company's market-capitalisation.

Take an Indian firm, which was trading at 10 times its earnings before interest, taxes, depreciation and amortization (EBITDA) six months back and acquired a company in the US, which was trading at four times its EBITDA. The Indian company, which will consolidate the accounts of the acquired firm into its balance-sheet, will hope that its stock trades at 8-10 times its EBITDA.

"With the fall in stock market and the value of the stock, this arbitrage opportunity is reducing, said KPMG's Khungar, adding "trading multiples have come down, which has taken the aggression out. The capability to finance has come down.''

"Given the overall economic situation, Indian firms will be more selective (with acquisitions abroad). The cost of funding has gone up while the availability of funds has become limited. This impacts their ability to do a transaction,'' said Sudip Rungta, head, M&A (hydrocarbons and technology), Essar Group.

Bankers say that Indian firms are better-off as they are part of large groups. Take the deals that some of the Tata group companies have done. "If the individual companies were to do these deals, it would have been difficult for them. Lenders take comfort from the group,'' said a banker.

Analysts say Indian companies are facing opposition in certain sectors or assets that a country considers strategic. "Deals are still happening in IT; there are no issues. When it comes to a large strategic asset, you may face a challenge,'' said Essar's Rungta.

At the crossroads

Indian companies' acquisition attempts are being opposed by unions, aggressive rivals, former parent or targets
Fall in the stock values of Indian companies has affected their leverage and ability to fund M&As
Experts say fear of Indian companies playing the outsourcing card to produce goods cheaper at home may stall acquisitions
Indian companies will have to be more selective with acquisitions abroad

"SUN PHARMA LOOKS TO POP UP TARO BY FORCE"

UPPING ANTE FILES SUIT IN NY
SUN PHARMA LOOKS TO POP UP TARO BY FORCE

SUN Pharmaceutical Industries, the country’s most valuable drug maker, has decided to launch a hostile bid for Israel’s Taro Pharmaceutical Industries. The is a rare instance of an Indian company making an unsolicited bid for a foreign firm. The move follows Taro’s rejection of a merger agreement with Sun last month. Taro had termed the offer “inadequate.” Sun said on Thursday that it will offer to purchase all outstanding shares of Taro in the next few days at $7.75 a share, the rate that both companies had agreed a year ago. Sun, which already holds a 36% stake in Taro, also said the offer is in line with the 2007 merger agreement between the two companies. Under that accord, Taro’s controlling shareholders, led by chairman Barrie Levitt, granted Sun the option to acquire all its shares if the merger fails. Sun has filed a lawsuit in the supreme court of the state of New York against Taro and its board of directors, requesting the court to order the controlling shareholders to honour the 2007 merger agreement. “We have had enough of the delays, excuses and misrepresentation by the board of Taro and Mr Levitt. Now it is time for Mr Levitt and his family to do what is required of them under the option agreement. We will do everything required to preserve our rights,” said Sun Pharmaceutical chairman Dilip Sanghvi. The successful acquisition of Taro will help Sun expand its marketing reach in the US where demand for generics continues to grow as health-care costs surge and more blockbuster drugs go off patent.

In May 2007, the Indian drugmaker offered to buy Taro for $7.75 per share and an additional $224 million to refinance debt, totalling $230 million in cash.

DEAL GOES BUST

Sun will offer to buy outstanding Taro shares at $7.75 a share. Says offer in line with 2007 merger pact

Indian co has also filed suit in New York against Taro and its board
Taro called off merger in May; said revised $10.25/share offer meagre

MAY 2007

Sun Pharma enters into a merger deal with Taro

MAY 2008
Sun receives Taro’s notice to terminate the agreement on difference of valuations

JUNE 2008

Sun replies to Taro disagreeing the termination

Legal battle kicks off between the two over the sale of Taro’s Irish plant

Sun files case in New York court against Taro Taro sought revised offer

SUN has given Taro $60 million in cash to revive the company and subsequently raised the offer to $10.25 a share. The Taro promoters and financial institutions having a combined 22% stake rejected the merger agreement with Sun Pharmaceutical last month, citing the domestic firm’s revised $10.25 a share offer as inadequate given the improvement in Taro’s operations. It had also filed a lawsuit in Israel on May 28 seeking to force Sun to make a revised offer. Sun refuses to do this.

“My sense of it is that the legal issues make it complex. While the litigation continues it will be difficult for Sun to get the shares from Taro’s promoters. I think that Sun filed the action to abide by the agreement. It exercised its option to be on the right side of the law. I don’t think it is going to be able to acquire the shares anytime soon.” Amod Karanjikar, an analyst with Edelweiss said.

Taro filed an injunction in the Tel-Aviv district court seeking to overrule the options agreement on May 28.

"GMR pays $1.1 bn for 50percent in Dutch power firm"

In the largest acquisition of a global energy utility by an Indian company, GMR Infrastructure has bought 50 per cent in the Netherlands-based power generation company, InterGen NV for $1.1 billion (approximately Rs 4,694 crore).

InterGen, which operates 12 power plants in England, Mexico, the Netherlands and Australia, has 8,086 MW of operational capacity and about 5,000 Mw of assets under development. The company had a turnover of $1.65 billion with profits of $613 million for the year ended December 2007. It employs about 700 people at various locations.

Bangalore-headquartered GMR has interests in airports, energy, highways and urban infrastructure. GMR bought 50 per cent in InterGen from AIG Highstar, a private equity group. Ontario Teachers Pension Plan (Teachers), the largest single-profession pension plan in Canada, holds the balance 50 per cent equity stake in InterGen. The deal will be closed before December.

"We will fund the acquisition through a special purpose vehicle which will get a bridge loan of $1.1 billion with two-year maturity from a consortium of five Indian banks," said Ashutosh Agarwala, chief financial officer, GMR.

The acquisition will help GMR get access to the super-critical technology of InterGen's Australian operations and will help it qualify for the ultra mega power projects coming up in India, said company officials