FACULTY OF MANAGEMENT STUDIES

INDIAN CORPORATE ON AN
ACQUISITION SPREE:
A DETAILED ANALYSIS
PROJECT REPORT

SANDEEP JORASIA
8/11/2010
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

Contents
AN OVERVIEW .................................................................................................................................. 3
OBJECTIVES OF THE STUDY .............................................................................................................. 6
LITERATURE: ..................................................................................................................................... 7
Acquisition ................................................................................................................................... 7
Emerging Trend and Its Effect ...................................................................................................... 7
Liberalization of Overseas Investment Policy .............................................................................. 7
Legal Framework .......................................................................................................................... 8
Funding ........................................................................................................................................ 9
Finance By Indian Banks............................................................................................................... 9
(a) TATA CORUS DEAL .................................................................................................................... 10
Timelines .................................................................................................................................... 11
Snapshot of the deal .................................................................................................................. 12
Short-Term Implications ............................................................................................................ 13
Equity dilution: ....................................................................................................................... 13
Margin picture: ...................................................................................................................... 13
The steel cycle: ....................................................................................................................... 14
Long-Run Picture ........................................................................................................................ 15
Progress on low-cost slabs ..................................................................................................... 15
Restructuring at Corus: .......................................................................................................... 16
Synergies: ............................................................................................................................... 16
(b) BHARTI- ZAIN DEAL ................................................................................................................... 18
Timelines: ................................................................................................................................... 18
Snapshot of the Deal:................................................................................................................. 20
(c) TATA MOTORS AND JAGUAR LAND ROVERS DEAL ................................................................... 24
Timelines- ................................................................................................................................... 24
Snapshot of the Deal:................................................................................................................. 25
Need for growth......................................................................................................................... 27
Competitive advantage .............................................................................................................. 27
CONCLUSION- ................................................................................................................................ 28
REFERENCES: .................................................................................................................................. 29

2
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

AN OVERVIEW:

In 90′s when late P.M PV Narsimha Rao laid the foundations for freeing up of our
economy, many people were saying that our Indian corporations were not yet ready to
face the competition. Much of that fear had to do with lack of equity, low quality
production, huge pricing power due to no-competition etc. Indian companies then were
not ready to give up their pricing power and ramp up quality production and thus were
against (not really against, but forced the political leadership to go slow) opening up of
our economy. However, our country slowly started freeing up economy and fortunately
too our companies had worked hard to grow on par with global standards.

Every now and then we read about our companies acquiring foreign companies. Looking
at the speed of acquisitions that Indian corporate are making we can truly say that Indian
corporate are on a acquisition spree. Let us see some of acquisition that have been made
by Indian companies in recent past

1) Bharti acquiring Zain telecom

2) Bharti acquiring Warid telecom

3) Tata buying Jaguar and Land Rover

4) Tata acquiring of Corus

5) Hindalco acquiring Novellis a Canadian company

6) Videocon acquiring Daewoo electronics

7) Tata Tea acquired Energy brand

8) Dr Reddy‘s acquired Beta Pharm

9) Suzlon energy acquired Hansen Transmission

10) Aban Lloyd acquired Sinvest

11) ONGC acquired Omimex De Columbia

3
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

12) Ranbaxy acquired Terapia

If we closely look at these deals they are from different market segments like telecoms,
commodities, pharma, Oil and Gas, beverages etc. This is pretty much a healthy trend and
is instilling a confidence among us that our Indian companies are scaling up globally. Just
few years ago, we were looking up to Microsoft, yahoo, oracle etc to start their
development centres here. We were very much interested in having MNC‘s here and it
was talk of the country when A.P Chief Minister wooed Bill Gates with Power Point
presentation to set up Microsoft subsidiary in Hyderabad. Now all that changed, Indian
companies are MNCs for West and rest. Indian companies now have moved off of their
protectionist mindset to that of confident mindset. They have started acquiring companies
abroad. How did all this change in a span of 10 years? The change we are witnessing now
is very dramatic and sudden. What caused that change or what is pushing them to shun
fear?

The trend began haltingly a few years ago. In 2000, Tata Tea took over a global company
twice its size, Tetley Tea, the second biggest tea company in the world. This was
followed by Essel Packaging, owned by Subhash Chandra, took over Propack of
Switzerland to form Essel Propack. The merger created the biggest producer in the world
of laminated tubes, and an Indian MNC became global number one. But these takeovers
remained exceptional events till 2003. Only in that year did the pace of Indian takeovers
accelerate so much as to constitute a new trend. More than 40 foreign companies were
taken over by Indians in 2003. Among the Indian companies on a takeover spree were
Tata Motors, Ranbaxy, Wockhardt, Hindalco, etc. The trend of acquiring foreign
companies was not limited to large size companies. Many middle-sized companies have
also become a part of this new trend. Sundaram Fasteners has acquired Dana Spicer
Europe, the British arm of a global multinational. Amtek Auto, another auto ancillary has
acquired the GWK group in the UK, which is twice its size are some of the few middle
sized companies which have joined the bandwagon. The trend continued with Indian
companies shelling out $1.7 billion in the first eight months of 2005 for acquiring
overseas companies. The biggest of the takeovers till date being the Tata Steel's $12.1
billion deal for Corus, the British steel company.

4
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

The increased number in overseas acquisitions by Indian companies is attributable to the

growing realization that the future growth of Indian companies will be influenced by the
share that they can garner in the world market. This is not only by producing in the
country and exporting, but also by acquiring overseas assets, including intangibles like
brands and goodwill, to establish overseas presence and to upgrade their competitive
strength in the overseas markets, which has resulted in cross-border acquisitions.

The policy regime in respect of outward capital flows has also evolved in spirit with the
above trend. In line with the calibrated approach to capital account, greater freedom is
now available to companies to make remittances overseas for their overseas expansion.
This is reflected in the increasing global operations of Indian companies in search of
global synergies and domain knowledge. Phased liberalization in the policy of overseas
investments has enabled Indian firms to establish presence in overseas markets on an
unprecedented scale redefining the global outreach of Indian entities.

The market is dictating and the Indian companies are delivering, so the growth story is
accelerating at a pace which we didn‘t expect. The investors are smart here. They are
taking money out of West depressing the company stock there and are stashing it in India
and forcing us to buy those depressed companies in West.
What is actually happening is movement of money from West to East. The money hence
will be in better hands and will see growth before it moves elsewhere. There is ample
proof of this trend. Hindalco is much smaller in market cap compared to Novellis and
similarly Tatas too is small compared to Corus and still we saw deals going through only
because institutional investors wanted it that way.

Graphical representation of Indian outbound deals since 2000

5
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

OBJECTIVES OF THE STUDY

The following are the objectives of this report:

1. To find out the reasons behind this exponential growth of acquisitions and their
success rates.
2. To study the M&A trends in the Indian Corporate Sector post liberalization
period.
3. To examine the following three cases
a. Case 1: Tata- Corus Deal (Steel)
b. Case 2: Bharti- Zain Deal (Telecom)
c. Case 3: Tata – JLR Deal (Automobile)
4. To forecast future scenario and trend

6
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

LITERATURE:

Acquisition
An acquisition, also known as a takeover, is the buying of one company (the ‗target‘) by
another. An acquisition may be friendly or hostile. In the former case, the companies
cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought
or the target's board has no prior knowledge of the offer. Acquisition usually refers to a
purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will
acquire management control of a larger or longer established company and keep its name
for the combined entity. This is known as a reverse takeover.

Section 395 of the Companies Act, 1956 provides the basic guidelines for acquiring an
Indian company by another Indian company. While overseas acquisitions would be
governed by the Takeover regulations applicable in the country where the target company
is situate.

Emerging Trend and Its Effect

The overseas acquisitions, which started off on a small scale, have reached to globally
visible levels with big ticket acquisitions being announced by large corporate regularly.
Tata group, Bharat Forge, Infosys, Wipro, ONGC, Ranbaxy and such Indian companies
are venturing overseas and expanding at breakneck speed. The effect of this trend on the
Indian economy has been rightly summarised by the Financial Minister
Mr.P.Chidambaram - "Indian industry today has the confidence to bid for business
abroad, raise resources, purchase and manage enterprises."

Liberalization of Overseas Investment Policy

The liberalisation of investment policies has made large outward remittances for overseas
acquisitions possible. Such policies have in particular expanded after the introduction of
the Foreign Exchange Management Act, in June 2000. In March 2003, the Automatic
Route was significantly liberalised to enable Indian parties to fund to the extent of 100%
of their net worth, which limit was later enhanced to 200%. As per a recent Federation if
Indian Chambers of Commerce and Industry (FICCI) study, while India Inc's
international acquisitions were rising gradually till 2004, the liberalization in the policy
regime for outward investment in 2005, which allowed Indian firms to invest in entities

7
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

abroad up to 200% of their net worth in a year, triggered a sharp rise in cross-border
acquisitions with the number of acquisitions rising from 46 in 2004 to a whopping 130 in
2005.

During 2007-08 (April-December), 1,595 proposals were approved for investments

abroad in JVs and WOSs by the Reserve Bank of India, which were higher by 25.8 per
cent than approval during the corresponding period of the previous year. All these factors
have provided the necessary thrust for the increase in the overseas investments and
acquisitions.

Legal Framework
Indian companies wanting to acquire companies abroad have to comply with various
aspects of The Companies Act of 1956, the Foreign Exchange Management Act of 1999,
The Securities Exchange Board of India Act of 1992, and the various regulations imposed
by the Reserve Bank of India. Also, the Take Over regulations applicable to the target
company would need to be adhered to.

The Indian companies may invest overseas either through the automatic route or with the
approval of the RBI. The present legal framework provides for investment overseas by
Indian companies up to 200 per cent of their net worth as per the last audited balance
sheet, in any bonafide business activity are permitted by Authorised Dealers (AD). Also
no prior approval of RBI is required for opening offices abroad. For initial expenses, AD
banks have been permitted to allow remittance up to 15 per cent of the average annual
sales/income or turnover during last two financial years or up to 25 per cent of the net
worth, whichever is higher.

For recurring expenses, remittance up to 10 per cent of the average annual sales/income
or turnover during last two financial years is allowed. Within these limits, ADs can allow
remittance by a company even to acquire immovable property outside India for its
business and for residential purpose of its staff. The Indian investors would also have to
file forms ODG/ODI depending on their method of investment in an overseas firm. The
detailed guidelines have been provided under Notification FEMA 120/RB-2004 dated
July 7, 2004, which is amended time to time.

8
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

Funding
Overseas acquisitions are being funded through a variety of sources such as drawl foreign
exchange in India, capitalization of exports, balances held in Exchange Earner‘s Foreign
Currency accounts (EEFC), share swaps through ADR/GDR, External Commercial
Borrowings/Foreign Currency Convertible Bonds, ADRs/GDRs, etc.

A substantial portion of investments takes place through special purpose vehicles (SPVs)
set up for the purpose abroad. Existing Wholly Owned Subsidiaries (WOS) / Joint
Venture (JV) or the SPVs are being used to fund acquisitions through Leveraged buy-out
(LBO) route. In fact the Tata – Corus deal was made possible by the scheme of leveraged
buy-out.

The major investment destinations appear to be the US and European markets. Tax
havens like Mauritius and Cayman Islands also feature significantly in the Indian
acquisitions or setting up of new WOS/JVs. In recent times, sustained growth in
corporate earnings has boosted the profitability and strengthened the balance sheets of
Indian companies. This has, in turn, strengthened their credit ratings and ability to raise
funds overseas.

Unlike most international M&A transactions that typically feature stock swaps in the
financing arithmetic, Indian acquirers have for the most part paid cash for their targets,
helped by a combination of internal resources and borrowings. Share swaps have not yet
emerged as a favoured payment option in India, except in a couple of large transactions in
the software industry.

Finance By Indian Banks

In view of the expertise in certain areas developed by Indian corporate over the years and
the importance attached to leveraging of such expertise for enhancing the international
presence of Indian corporate, with effect from June 7, 2005, banks have been allowed to
extend financial assistance to Indian companies for acquisition of equity in overseas joint
ventures/wholly owned subsidiaries or in other overseas companies, new or existing, as
strategic investment, in terms of a Board approved policy, duly incorporated in the loan
policy of the bank. Such policy should include overall limit on such financing, terms and
conditions of eligibility of borrowers, security, margin, etc. While the Board may frame

9
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

its own guidelines and safeguards for such lending, such acquisition(s) should be
beneficial to the company and the country. The finance would be subject to compliance
with the statutory requirements under Section 19(2) of the Banking Regulation Act, 1949.

In April 2003 banks were permitted to extend credit/non-credit facilities to Indian Joint
Ventures (JVs) (where the holding by the Indian company is more than 51%) / Wholly
Owned Subsidiaries (WOS) abroad up to the extent of 10 per cent of their unimpaired
capital funds subject to certain terms and conditions. On November 6, 2006, in order to
facilitate the expansion of Indian corporate business abroad, it was decided to enhance
the prudential limit on credit and non-credit facilities extended by banks to Indian Joint
Ventures (where the holding by the Indian company is more than 51%) /Wholly Owned
Subsidiaries abroad from the existing limit of 10 per cent to 20 per cent of their
unimpaired capital funds.

Let us study some of the deals to have a look what are the forces behind these takeovers

(a) TATA CORUS DEAL

10
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

Timelines

 On October 20, 2006, Tata Steel announced that it had agreed to pick up a 100%
stake in the Anglo-Dutch steel maker Corus at 455 pence per share in an all cash
deal, cumulatively valued at GBP 4.3 billion (USD 8.04 billion).

 On November 19 2006, the Brazilian steel company CSN launched a counter offer
for Corus at 475 pence per share, valuing it at $8.4 billion.

 On December 11 2006, Tata preemptively upped the offer to 500 pence, which
was within hours trumped by CSN's offer of 515 pence per share, valuing the deal
at $ 9.6 Billion. The Corus board promptly recommended both the revised offers
to its shareholders.

 On December 11, 2006, CSN announced a formal offer for the Company at an
offer price of 515 pence per Corus Share , valuing the deal at $ 9.6 Billion.. The
CSN Acquisition would also be implemented by way of a scheme of arrangement
and is subject to a pre-condition that either Corus Shareholders reject the Tata
Scheme or the Tata Scheme is otherwise withdrawn by Corus or lapses. The
Corus board promptly recommended both the revised offers to its shareholders.

 Also on December 19, 2006, UK Watchdog the Panel on Takeovers and Mergers
announced that the last date for each of Tata and CSN to announce revised offers
for the Company, should they wish to do so, is 30 January 2007. They also
warned that it would begin an auction procedure if the two remained in
competition.

 On January 31 2007 Tata Steel won their bid for Corus after offering 608 pence
per share, valuing Corus at $11.3bn

11
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

Snapshot of the deal

Sector Steel
Acquiring Company TATA Steel
Acquired Company Corus
Value of the Deal $11.3 billion
Financing the deal Equity and debt

This was the largest deal in the Indian history of cross border acquisition where TATA
acquire Corus which is four times in size. In a giant leap, Tata Steel's acquisition of the
Anglo-Dutch steel major Corus has vaulted the former to the fifth position from 56th in
global steel production capacity. With the exception of Arcelor Mittal, which has
combined production capacities of 110 million tonnes, Tata Corus, with a capacity of
23.5 million tonnes, will be only 5-7 million tonnes shy of the next three players —
Nippon Steel, Posco and JFE Steel. At the same time, it will also have players such as
Baosteel, US Steel, Nucor and Thyssenkrupp breathing down its neck in the global
sweepstakes.

Spelling out the rationale for the deal, Mr Ratan Tata, Chairman, Tata Sons, has claimed,
"... it will take several years for us (Tatas) to build a 19-million-tonne enterprise from
scratch, leave alone establishing it in Europe with a brand name." In that sense, it is
obviously an important strategic move for Tata Steel with long-term global implications
in a consolidating sector.

This hotly-contested mega deal has, however, come at a stiff price of $12.1 billion in
equity value and with a debt component of around $1.5 billion Corus as an enterprise is
worth $13.6 billion. That takes the winning final bid for the shares of Corus 34 per cent
higher than the initial offer the Tatas made on October 20.

The Tata Steel stock has shed over 10 per cent since the acquisition and has also been a
sharp under-performer relative to the broad market and its sectoral peers over the past six

12
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

months. With the debate on "overvaluation' and "winner's curse" hanging over this deal,
here is a look at the implications from a short- and long-term investment perspective:

Short-Term Implications

Investors with a one-to-two year perspective may find the Tata Steel stock unattractive at
current price levels. While the potential downside to the stock may be limited, it may
consolidate in a narrow range, as there appears to be no short-term triggers to drive up the
stock. The formalities for completing the acquisition may take three to four months,
before the integration committees get down to work on the deal. In our view, three
elements are stacked against this deal in the short run:

Equity dilution: The financing of the acquisition is unlikely to pose a challenge for the
Tata group, but the financial risks associated with high-cost debt may be quite high.
Though the financing pattern is yet to be spelt out fully, initial indications are that the
$4.1 billion of the total consideration will flow from Tata Steel/Tata Sons by way of debt
and equity contribution by these two and the balance $8 billion, will be raised by a
special investment vehicle created in the UK for this purpose. Preliminary indications
from the senior management of Tata Steel suggest that the debt-equity ratio will be
maintained in the same proportion of 78:22, in which the first offer was made last
October.

Based on this, a 20-25 per cent equity dilution may be on the cards for Tata Steel. The
equity component could be raised in the form of preferential offer by Tata Steel to Tata
Sons, or through GDRs (global depository receipts) in the overseas market or a rights
offer to shareholders.

This dilution is likely to contribute to lower per share earnings, whose impact will be
spread over the next year or so. As Tata Steel also remains committed to its six-million-
tonne greenfield ventures in Orissa, its debt levels may rise sharply in the medium term.

Margin picture: Short-term triggers that may help improve the operating profit margin of
the combined entity seem to be missing. In the third quarter ended September 2006,
Corus had clocked an operating margin of 9.2 per cent compared with 32 per cent by Tata

13
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

Steel for the third quarter ended December 2006. In effect, Tata Steel is buying an
operation with substantially lower margins.

This is in sharp contrast to Mittal's acquisition of Arcelor, where the latter's operating
margins were higher than the former's and the combined entity was set to enjoy a better
margin. Despite that, on the basis of conventional metrics such as EV/EBITDA and
EV/tonne, Arcelor Mittal's valuation has turned to be lower than Tata Corus. On top of
that, Tata is making an all-cash offer for Corus vis-à-vis the cash-cum-stock swap offer
made by Mittal for Arcelor.

Corus has been working on the "Restoring Success" programme aimed at closing the
competitive gap that existed between Corus and the European steel peers. The gap in
2003 was about 6 per cent in the operating profit level when measured against the
average of European competitors. And this programme is expected to deliver the full
benefits of 680 million pounds in line with plan. With this programme running out in
2006 and being replaced by `The Corus Way', the scope for Tata Steel to bring about
short-term improvements in margins may be limited.

Even the potential synergies of the $300-350 million a year expected to accrue to the
bottomline of the combined entity from the third year onwards, may be at lower levels in
the first two years. As outlined by Mr B. Muthuraman, Managing Director of Tata Steel,
synergies are expected in the procurement of material, in the marketplace, in shared
services and better operations in India by adopting Corus's best practices in some areas.

The steel cycle: While the industry expects steel prices to remain firm in the next two-
three years, the impact of Chinese exports has not been factored into prices and the steel
cycle. There are clear indications that steel imports into the EU and the US have been
rising significantly. At 10-12 million tonnes in the third quarter of 2006, they are twice
the level in the same period last year and China has been a key contributor.

This has led to considerable uncertainty on the pricing front. Though regaining pricing
power is one of the objectives of the Tata-Corus deal, prices may not necessarily remain
stable in this fragmented industry. The top five players, even after this round of
consolidation, will control only about 25 per cent of global capacities. Hence, the steel

14
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

cycle may stabilise only if the latest deal triggers a further round of consolidation among
the top ten producers.

Long-Run Picture

Whenever a strategic move of this scale is made (where a company takes over a global
major with nearly four times its capacity and revenues), it is clearly a long-term call on
the structural dynamics of the sector. And investors will have to weigh their investment
options only over the long run.

Over a long time-frame, the management of the combined entity has far greater room to
manoeuvre, and on several fronts. If you are a long-term investor in Tata Steel, the key
developments that bear a close watch are:

Progress on low-cost slabs: Research shows that steel-makers in India and Latin
America, endowed with rich iron ore resources, enjoy a 20 per cent cost advantage in slab
production over their European peers. Hence, any meaningful gains from this deal will
emerge only by 2009-10, when Tata Steel can start exporting low-cost slabs to Corus.

This is unlikely to be a short-term outcome as neither Tata Steel's six-million-tonne

greenfield plant in Orissa nor the expansion in Jamshedpur is likely to create the kind of
capacity that can lead to surplus slab-making/semi-finished steel capacity on a standalone
basis.

Second, there may be further constraints to exports as Tata Steel will also be servicing the
requirements of NatSteel, Singapore, and Millennium Steel, Thailand, its two recent
acquisitions in Asia.

However, this dynamic may change if the Tatas can make some acquisitions in low-cost
regions such as Latin America, opening up a secure source of slab-making that can be
exported to Corus's plants in the UK. Or if the iron ore policy in India undergoes a
change over the next couple of years, Tata Steel may be able to explore alternatives in the
coming years.

15
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

Restructuring at Corus:

The raison d'etre for this deal for Tata Steel is access to the European market and
significantly higher value-added presence. In the long run, there is considerable scope to
restructure Corus' high-cost plants at Port Talbot, Scunthorpe and the slab-making unit at
Teesside.

The job cuts that Tata Steel is ruling out at present may become inevitable in the long
run. Though it may be premature at this stage, over time, Tata Steel may consider the
possibility of divesting or spinning off the engineering steels division at Rotherham with
a production capacity of 1 million tonnes. The ability of the Tatas to improve the
combined operating profit margins to 25 per cent (from around 14 per cent in 2005) over
the next four to five years will hinge on these two aspects.

Two factors may soften the risks of dramatic restructuring at the high-cost plants in UK.
If global consolidation gathers momentum with, say, the merger of Thyssenkrupp with
Nucor, or Severstal with Gerdau or any of the top five players, the likelihood of pricing
stability may ease the performance pressures on Tata-Corus.

Two, if the Tatas contemplate global listing (say, in London) on the lines of Vedanta
Resources (the holding company of Sterlite Industries), it may help the group command a
much higher price-earnings multiple and give it greater flexibility in managing its
finances.

Synergies:

-Tata was one of the lowest cost steel producers & Corus was fighting to keep its
productions costs under control.

-Tata had a strong retail and distribution network in India and SE

Asia. Hence there would be a powerful combination of high quality
developed and low cost high growth markets

-Technology transfer and cross-fertilization of R&D capabilities.

-There was a strong culture fit between the two organizations both of which highly
emphasized on continuous improvement and Ethics.

16
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

-Economies of Scale.
-Increase in profitability.
-Backward integration for Corus and Forward integration for Tata
Steel

17
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

Now let us take the latest acquisition that is of Zain Telecom by Bharti.

(b) BHARTI- ZAIN DEAL

Timelines:
Let us see how a process of acquisition takes place by looking at the Bharti-Zain deal as
how it worked out.

Bharti was reported to have shown interest in Zain long time back around July, 2008.
That had closely followed a month later after Africa‘s largest Telco MTN had spurned
the alliance proposal of the Indian Company. While it remained as a speculation and soon
faded with time, the news again became the major headlines in the mid of February,
2010.

14th February, 2010:- Bharti offered $10.7 billion to buy African assets of Kuwait‘s Zain
telecom, the former Celtel networks which was acquired by Zain for $3.4 billion in 2005.

15th February, 2010: Airtel‘s shares slip by 10% as the news about the buyout spreads
around. Bank of America-Merrill Lynch said that the valuation seemed rich, the growth
outlook for Zain‘s African portfolio was unexciting and a potential deal could materially
stress Bharti‘s balance sheet. Zain‘s African operations had incurred a loss of around $1
million in nine months until Sep 2009 and this kind of criticism was bound to rise.

18
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

18th February, 2010: Bharti announces that out of the total agreed enterprise valuation of
$10.7 billion, the company would pay a total of around $9 billion and that $1.7 billion
would be paid a year later after the deal is closed.

19th February, 2010: Two minority share holders of Zain in Africa, Econet Wireless
Holdings Ltd and Broad Communications Ltd, objected to any transfer of the company‘s
Nigerian assets. Econet which held 5 per cent of Zain Nigeria and Broad
Communications which owned 14 per cent stake in Zain Nigeria wanted some legal
issues to be solved before Zain was handed over to Bharti. Econet wanted to overturn the
2006 deal in which Celtel, now Zain, bought a controlling 65 per cent stake in the
business while Broad wanted to enforce its rights in any potential transfer of ownership
of its shareholding in Celtel.

22th February, 2010: Rumours arose that Bharti might sell its shares to Singapore
Telecommunications that owns just under a third of the Bharti Airtel , in order to partly
fund its purchase and avoid taking on too much debt.

4th March, 2010: Akhil Gupta, group deputy CEO and MD of Bharti Enterprise hinted
that new shares might be issued by Indian Telco Bhatia Airtel or it might strip down its
holdings in telecommunication infrastructure companies to reduce the burden of debt. He
said that the company would use a combination of free cash flow and equity to repay debt
and that there was a possibility to raise more equity at Airtel or Bharti Infratel level.

9th March, 2010: Sources revealed that Bharti would raise $7b in loan to finance the
purchase through a six-year U.S. dollar loan with an average maturity of 4.75 years.
Another $2 billion to $3 billion would be raised by a rupee loan.

15th March.2010: SingTel‘s CEO International Lim Chuan Po confirmed that the
company would be a part of the funding process for Zain‘s purchase by Bharti but it
would not inject money directly into Bharti Airtel. It would instead finance the
acquisition via debt.

16th March, 2010: The legal conflict between Econet and Bharti were reported as being
solved to great extent. However there was no such intimation from Econet.

19
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

16th March, 2010: Indian Telco Bharti Airtel issued a term sheet to banks in order to
raise up to $8.5 billion in offshore loans to fund its $9 billion deal.

22nd March, 2010: Bharti board approved $9 billion Zain deal and planned to make a
formal offer the following week.

25th March, 2010: The board of Kuwait-based Mobile Telecommunications Co. KSC,
Zain approved the sale of its African assets to Bharti Airtel Ltd at $10.7 billion.

29th March, 2010: A source revealed that the deal over Bharti‘s purchase of the African
assets of Kuwait‘s Zain would be signed in Amsterdam on Tuesday.

29th March, 2010: The government of Gabon raised a regulatory objection to the deal. It
said that Zain Gabon had not complied with telecoms regulations and thus
it‖disapproved‖ of the sale of Zain‘s Gabonese assets, and reserved the right to take ―all
necessary measures‖.

31st March, 2010: Economic Times reported that $10.7-billion deal, including $1.7
billion of Zain‘s debt, was signed in Amsterdam, the base of Zain‘s African unit

So this was the process from start to end.

Snapshot of the Deal:

Sector Telecom
Acquiring Company Bharti Airtel, India
Acquired Company Zain, Africa
Value of the Deal $10.7 billion
Financing the deal Debt from SBI and other foreign banks

20
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

This is the largest ever telecom takeover by an Indian firm. Bharti Airtel completed a deal
to buy Kuwait-based Zain Telecom's African business for $10.7 billion in June 2010. The
deal marks the second biggest overseas acquisition by an Indian company, after Tata
Steel purchased Corus Group for $12.2 billion in an all cash deal in January 2007.

The Corus deal was the largest Indian takeover of a foreign company and made Tata Steel
the world's fifth-largest steel group. The acquisition of Zain's African assets also
catapulted Bharti Airtel to become the fifth largest telecom operator in the world with
revenues of an estimated $13 billion a subscriber base of over 179 million and earnings
before interest, taxes, depreciation and amortization (EBITDA) of around US$5 billion.

Bharti Airtel has been seeking an African venture since 2008. Bharti had failed twice
since 2008 to forge a $23 billion merger deal with South African telecom giant MTN.
The principal shareholders of the Zain Group of Kuwait, one of the region's largest
telecom service providers, have also been looking for a buyer for the company's assets in
Africa. This deal is expected to bring in synergy for both the companies. This acquisition,
besides giving Bharti its much-desired presence in Africa, makes it the world's fifth
largest wireless company with operations across 18 countries and a huge subscriber base.

However, the deal has also given rise to misgivings. Bharti shares plunged to around 14%
on the day of announcement of the deal. Almost every research house has been critical of
the deal. The comments range from "Pained by Zain; Rating Cut" from Bank of America
Merrill Lynch to "Very expensive diversification" by Credit Suisse.

The principal issue is one of valuations. Everyone seems to agree that Zain is a good
target for acquisition, but is it worth the price Bharti is paying? Zain's African operations
are losing money. In the nine months to September 2009, they reported a net loss of
US$112 million against a profit of US$169 million in the corresponding period the
previous year. Seven of the 15 countries reported losses. The highest revenue earner,
Nigeria, which was nudging the US$1 billion mark, lost US$88 million. These are
markets where the telephone penetration rates range from 14% in the Democratic
Republic of the Congo to 123% in Gabon, though most are in the low double digits. Zain
has 42 million subscribers in Africa (September 2009) while Bharti has 121.7 million in

21
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

India (December 2009). Customer growth rates range from -14% in Kenya and -6% in
Nigeria to 51% in Niger. The average revenue per user (ARPU) is US$3 in Ghana and
US$25 in Gabon. The ARPU, a frequently used yardstick in the telecom industry, is an
average of US$6 for Zain's African operations against US$5 for Bharti in India.

These numbers can be used to paint an optimistic picture or a pessimistic one. For
instance, low penetration rates could mean either a huge upside opportunity or lack of
demand needing many years of expensive market development. Low ARPUs could imply
poor revenue streams or future growth potential. In contrast to Africa, in its Middle East
portfolio, Zain has an ARPU of US$55 in Kuwait and US$26 in Bahrain. But if Bharti
can successfully transpose its high minutes of use model -- described as a "minute-
factory" -- to Africa, it could be highly profitable even at these low ARPUs. Besides,
some operations are showing losses because of mismanagement.

Bharti will be paying Zain US$252 per subscriber. In September 2009, when Bharti was
trying to strike a deal with MTN, the two sides had valued each customer of the South
African firm at US$394. Vodafone paid US$743 per user when it acquired Hutchison's
India operations in February 2007. Deals a few years ago have attracted even higher
valuations in the US$361 to US$1,050 range. However what needs to be noted is that
these higher valuations of the past were out of expectations of a stupendous growth in
India's subscriber base which might not be the case with Africa. On the other hand,
supporters of the deal argue that in the long run, the strategy of getting its Foot print
across the 15 African countries is definitely a great value proposition for Bharti.

This is also a special case, because of the cultural factors involved which will influence
how the two companies will integrate their operations. Zain was launched in 1983 as the
region's first mobile operator. It was known at that time as MTC. In 1994, the company
introduced GSM technology in Kuwait, becoming one of the first companies in the region
to do so. The company embarked on an aggressive growth path after Saad Al Barrak took
over as CEO of the Zain Group in 2002. He worked hard to convert a Kuwaiti telecom
operator into a global one. With 24 countries and 71.8 million customers, Zain was close
to fulfilling Al Barrak's dream. The target set for 2011 was to be among the top 10
telecom companies in the world with more than 150 million customers. The proposed

22
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

sale of Zain Africa BV represents a change in course in the company's strategy. A few
days before the Bharti deal was announced, Al Barrak announced his resignation, which
was promptly accepted. But the Zain corporate culture is imbued with his go-getting
style. Bharti could run into integration problems in Africa.

Of the $10.7 billion enterprise value of Zain, Bharti paid $8.3 billion upfront and will pay
$700 million after a year. This wiped out the about $1.5 billion from its balance sheet. It
also took over approximately $1.7 billion of Zain's debts as on December 31, 2009. Of
the $8.3 billion paid to Zain, Bharti had raised debt from a consortium of foreign banks
and State Bank of India with the lead-arranger and lead-advisor Standard Chartered Bank
committing the highest amount -- $1.3 billion, followed by Barclays at $900 million. The
rest of the co-advisors -- ANZ, BNP, Bank of America-Merrill Lynch, Credit Agricole
CIB, DBS, HSBC, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking
Corporation -- have allocated $600 million each. State Bank of India has agreed to an up
to $one billion loan in rupee terms.

23
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

(c) TATA MOTORS AND JAGUAR LAND ROVERS DEAL

Timelines-

2005- Ford starts facing problems with pension and health care costs and falling sales in
North America. Starts reporting losses from the second quarter
2006-Alan Mullaly takes over as chief executive and oversees a $12.7 billion loss, the
largest in the company's history Ford decides to sell its Aston Martin brand
May, 2007- Ford closes the Aston Martin sale for $848 million
June, 2007- Ford indicates that it might look at buyers for Jaguar and Land Rover
marques
July, 2007- Ford receives preliminary bids for the brands. Reports say that TPG Inc.,
Cerberus Capital Management Lp. Ripplewood Holdings, One Equity Partners Llc are in
the fray, along with Tata Motors
Ltd and Mahindra & Mahindra

24
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

August, 2007- Ratan Tata, chairman of Tata Motors Ltd, confirms that his company was
bidding for the premium car
Makers
November, 2007-Investment bankers say that Apollo Alternative Assets is teaming up
with Mahindra & Mahindra
Reports say that Ford has shortlisted three bidders—Tata, Mahindra and One Equity—for
further negotiations with its trade unions Unite, the trade union representing Land Rover
and Jaguar workers, says it supports Tata Motors' bid
December, 2007- The three bidders submit their bid
January, 2008- Ford names Tata as "preferred buyer"
March, 2008-Tata, Ford sign deal

Snapshot of the Deal:

Sector Automobile
Acquiring Company Tata Motors, India
Acquired Company Jaguar Land Rover, United Kingdom
Value of the Deal US $ 2.3 billion
Financing the deal Bridge loans, Cash reserves and

During June 2008, India-based Tata Motors completed the acquisition of the Jaguar and
Land Rover (JLR) units from the US-based auto manufacturer Ford Motor Company
(Ford) for US$ 2.3 billion, on a cash freedebt free basis. JLR was a part of Ford‘s Premier
Automotive Group (PAG) and were considered to be British icons. Jaguar was involved
in the manufacture of high-end luxury cars, while Land Rover manufactured high-end
SUVs.
Forming a part of the purchase consideration were JLR‘s manufacturing plants, two
advanced design centers in the UK, national sales companies spanning across the world,
and also licenses of all necessary intellectual property rights. Tata Group had several
major international acquisitions to its credit. It had acquired Tetley, South Korea-based
Daewoo‘s commercial vehicle unit, and Anglo-Dutch Steel maker Corus. Tata Motors‘
long-term strategy included consolidating its position in the domestic Indian market and

25
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

expanding its international footprint by leveraging on in-house capabilities and products

and also through acquisitions and strategic collaborations.

According to this deal, Ford will contribute US$ 600 m to pension fund which will be
sufficient to meet the requirements. During the deal, there was no debt in the books
except for trade payables. Also, Ford will continue to supply Jaguar Land Rover for
differing periods with power trains, stampings and other vehicle components, in addition
to a variety of technologies, such as environmental and platform technologies. Ford
Motor Credit Company will provide financing for Jaguar and Land Rover dealers and
customers during a transitional period, which can vary by market, of up to 12 months.

The reason for Ford selling the brands includes losses by Jaguar stood at USD 715
million at the time of buying. Jaguar has not been able to provide any profit for ford
because of the high manufacturing costs in the United Kingdom. Land Rover's profit, on
the other hand, was driven by the record sale of 2.26 lakh vehicles, an 18% YoY growth
in 2007. Ford is combining both the brands since the products and manufacturing of
vehicles for Land rover and Jaguar is so intertwined Bringing down production costs and
turning around the company successfully was the challenge and Ford failed.

Initially there was investor pessimism about the deal. The chief concerns were Price,
Timing and the quality of assets. The share prices of Tata Motors were no a decline ever
since the news that Tata was in the race to acquire JLR.

There are several reasons why Tata Motors went ahead with the acquisition despite
criticism. These include:

a) Long term strategic commitment to the Automotive sector

b) Opportunity to participate in two fast growing auto segments
c) Increased business diversity across markets and products.
d) Jaguar offers a range of ―performance/luxury‖ vehicles to broaden the
brand portfolio
e) Land rover provides a natural fit for Tata Motors‘ SUV segments

26
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

f) Benefits from component sourcing, design services and low cost

engineering

Recent quarterly statement shows that JLR is in a profit of £55m. Today Tata Motors has
the distinction of making cars in all price ranges from 1 lakh Nano to 1 crore Jaguar
under its brand.

Need for growth

•In the past few years, the Tata group has led the growing appetite among Indian
companies to acquire businesses overseas in Europe, the United States, Australia and
Africa - some even several times larger - in a bid to consolidate operations and merge as
the new age multinationals.
•Tata Motors is India's largest automobile company, with revenues of $7.2 billion in
2006-07. With over 4 million Tata vehicles plying in India, it is the leader in commercial
vehicles and the second largest in passenger vehicles.

Competitive advantage
•Tata Motors is vulnerable to greater competition at home. Foreign vehicle makers
including Daimler, Nissan Motor, Volvo and MAN AG have struck local alliances for a
bigger presence.
•Tata Motors, which has a joint venture with Fiat for cars, engines and transmissions in
India, is also facing heat from top car maker Maruti Suzuki India Ltd, Hyundai Motor ,
Renault and Volkswagen

27
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

CONCLUSION-
The pace with which Indian Inc has been investing in M&A has stunned many. But there
have been obvious reasons why India has been hogging the limelight. The buoyancy in
Indian economy has strengthened the balance sheet of corporate enabling them to look for
inorganic growth by way of acquisitions outside India. By undertaking overseas
acquisition, Indian companies are now vying for a share in the regulated market of
developed countries. Here are some important reasons why I feel like that Indian
corporate are on an acquisition spree:

 Transfer of technology (By acquiring companies abroad, Indian firms are also
getting their hands on advance manufacturing technologies which help in
cutting the cost of production)
 Competition and survival (Due to cut throat competition and desire for
expansion, acquisition is the best way to expand and grow without investing
time into it)
 Support of Indian government (The RBI, in March 2003, significantly liberalized
the policies for Indian investment abroad. It enabled the Indian corporate to
fund 100% of their net worth, which was later increased to 200%)
 Various Funding options (These include drawl foreign exchange in India,
capitalization of exports, balances held in EEFC accounts, ECBs/FCCBs,
ADRs/GDRs, etc along with SPVs)
 Favourable domestic market (falling import tariff, increased buying power of
customers, low interest rates adds to corporate earnings)
 Confident and adventurous leaders (Tata steel acquiring corus which is four
times bigger than former, Hindalco buying Novelis double of its size)

28
 INDIAN CORPORATE ON AN ACQUISITION SPREE:
A DETAILED ANALYSIS

REFERENCES:

www.moneycontrol.com
www.equitymaster.com
www.reuters.com
www.bloomberg.com
www.economictimes.com
www.tata.com
www.ford.com
www.thehindubusinessline.com
www.wirelessfederation.com
www.profit.ndtv.com
www.hindustantimes.com
www.zain.com

29