The Hindu Business Line : Whether Tatas gain or not, banks will win

Advertisement

Chennai Feb. 1 Time will tell whether the Tatas will win or lose from the Corus takeover. But investment banks financing the leveraged buyout will rake in more than $1 billion a year.

It is because of such high returns on `heads I win tails you lose' investments that Morgan Stanley, Merrill Lynch, Goldman Sachs and others, were, according to a Bloomberg report, able to raise $712 billion worldwide in 2005 and 2006 for financing leveraged buyouts.

Funding

An October 2006 joint presentation by the Tatas and Corus on the 455 pence/$8.2 billion offer put the figure for Tatas' own funds at about $2 billion. This is in line with a Bloomberg report stating that 78 per cent of the December 2006 500 pence/$9.2 billion offer was to be funded by debt. The $7.2 billion debt required by the Tatas for the latter offer would cost them $1 billion a year.

Investment banks earn a return of about 14 per cent on `buyout' funds. The Tatas might have negotiated a better deal. But a 78:22 debt equity ratio is something that most borrowers do not feel the need for, and most bankers do not feel comfortable with.

At the press conference following the fiercely contested `auction', the Tata Steel Managing Director, Mr B. Muthuraman, said that of the $12.1 billion required to finance the acquisition, `the total contribution of Tata Steel and Tata Sons would be around $4.1 billion, comprising part debt, and part equity.' More debt will now be needed, and financiers will up their price.

On the other hand, the Tatas alone bear the risk. Assets of both the Tatas and the newly-acquired Corus will be put up as collateral. This increases their bargaining power. Besides, interest on debt is a business expense, and losses can be carried forward.

More Stories on : Mergers & Acquisitions | Overseas Investments | Steel | Tata Steel Ltd

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Maruti, Hyundai raise prices

Motorola rejects BSNL offer on cellular contract

Continental-Soma venture bags Rs 813-cr Delhi Metro contract

Tata Steel acquires 21.1% in Corus

What next?

Whether Tatas gain or not, banks will win

Alembic acquires Dabur's domestic non-oncology biz

Corus is a good buy for the Tatas: StanChart CEO

CSN expects to reap `incentive remuneration' from Corus

Kunz may start Chennai operations in Sept

`The only bids that matter are final ones'

CCEA okays HMT Machine revamp

Usha Martin to develop captive coal mines