Corus chorus, not so porous

If the Tata and Birla global conquests are a prelude to similar enactments in future, that is sufficient reason why we should be wary of media-induced euphoria and debt-financed illusions of a ‘global Indian takeover’

Sukumar Muralidharan Delhi

Puzzlement has followed most public reactions to the mega deals that have seen Indian companies aggressively pursue global players and buy them up. Money that once seemed beyond the ambitions of the country — money that could cover India’s entire defence budget and substantially bridge the fiscal deficit, the most intractable problem of the economy — suddenly seemed within easy reach of India’s corporate houses. And a country that once seemed the poor relative in a world where investor interest was the ultimate benediction, seemed to have turned the tables. From desperately seeking foreign investment, India has transformed itself into a source for much foreign investment.

However, business pundits and the media suffered none of the confusion of the civil society, certifying the recent deals as an unequivocal signal that India has arrived on the world stage. Yet, for all the euphoria in evidence in these quarters, the response of the stockmarkets was, if anything, curiously contrary.

Shares in Tata Steel fell sharply the day it announced that it had tied up a mammoth $12 billion deal to take over the Anglo-Dutch steel conglomerate, Corus. And the Birla-owned Hindalco was buffeted by similar shareholder scepticism immediately after its announcement that it would take over the Canadian aluminium major Novelis, in a deal costing $6 billion.

If the stockmarket were to be considered a reliable barometer of business prudence, the verdict on corporate India’s two most recent mega-deals has been fairly unequivocal. They have come at too high a price. The Tata and Birla acquisitions in this respect closely mirror last year’s takeover of the European steel manufacturer, Arcelor, by the Lakshmi Mittal group. After much competitive haggling which compelled Mittal to successively hike up his bid, he finally had to settle for a merger plan that confined his shareholding to a distinct minority.

By acquiring Corus, Tata Steel has emerged as the world’s fifth largest steel manufacturer in terms of capacity. On annual sales revenue computations, it would be catapulted to the mid-200s in rankings in the Fortune 500 global list. This would put it well ahead of Reliance Industries and Indian Oil in the global list of Indian corporations.

Yet, the adverse reaction of the stockmarket needs to be considered, because Tata’s acquisition has, after a host of modestly sized deals, brought the practice of massively leveraged buyouts to the Indian corporate landscape. Modes of financing the $12 billion (or Rs 53,000 crore) deal still remain secret.

The initial offer made by Tata was for a takeover valued at $8.8 billion. At this level, the plan was to invest $3.5 billion as equity from Tata and raise the rest through debt. The calculation, simply, was that the increased debt of $5.3 billion (or roughly Rs 23,000 crore) could be serviced through the cash flows that the Corus acquisition would bring.

Intense competition from a Brazilian steel company forced the Tatas to increase their offer in stages. Financing a deal finally concluded at an immensely higher cost, could now require certain extraordinary recourses. Apart from the money that the Tatas can summon from the coffers of their cash-rich companies, a sell-off in the business group’s principal revenue source, the Tata Consultancy Services (TCS), now seems inevitable. And even when this option has been pushed to the limits of its feasibility, Tata Steel would need to raise fresh capital through a public issue of shares.