Merger & Acquisitions Corporate Restructuring. Sanjeev... · Tax advantages. 7 Agenda Background...
Transcript of Merger & Acquisitions Corporate Restructuring. Sanjeev... · Tax advantages. 7 Agenda Background...
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Economic Reforms: Journey 1991-2009
Period Pre 1991 1991-1997 1998-2003 2004-2009
Economic Indicators
GDP/ p.a. (USD Bn) 250 375 600 1,100
GDP Growth (%) 3-5% 4-7% 4-6% 7-9%
Country Rating BB+ / Ba1 BBB-/Ba3
Forex Reserves (USD Bn) 4 4-26 26-76 80-280
Balance of Payments (USD Bn) Crisis situation 2-7 (surplus) 8-10 (surplus) 16-55 (surplus)
Fiscal Deficit (% of GDP) 7.5% 5-7% 5-6% 3.5-7%
Tax collections (% of GDP) 10.5% 9.5% 8.5-9% 10-12%
Tax Rates 54% 52-46% 43-36.75% 33.60-33.99%
Exchange Rate INR/USD < 20 30-35 35-49 39-52
Sensex 700 1,000-3,500 3,500-4,500 5,000-22,000
Market Cap (Rs Crs) 65,000 5,00,000 6,00,000 50,00,000
M&A (USD Bn) 22
FDI Inbound (USD Bn) Negligible 2-3 4-5 6-42
Portfolio Investment (USD Bn) Negligible 2-3 2-3 10-20
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India Story
Outward FDI
Developed country phenomenon till 1980s;
Developing economies’ share increased from 5% to 20% in two decades
Emerging to developed countries (E2D) on the rise
India
Cumulative outward FDI from USD 0.5 bn in 2005 to USD 62 bn in 2008
Outward FDI stands at half of the inbound FDI (USD 123 bn)
Bharti – Warid, Zain (USD 11 bn)
Scale/Market Presence
Tata- Chorus (EUR 8.5 bn)
Tata- JLR (USD 2.3 bn)
Brands/Technology/Assets
ONGC–Imperial (GBP 1.4 bn)
Essar - Trinity Coal (USD 600 Mn)
Raw Material
UB–Whyte & Mackay(GBP 600 Mn)
GMR- Intergen (USD 1.1 bn)Hindalco – Novelis (USD 6 bn)
Suzlon – REpower (EUR 1.3 Bn)
Renuka - Equipav (USD 300 Mn)
Reddy – Betapharm (EUR 480 Mn)
Recent Acquisitions
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Why M&A – inorganic route
Forward & backward integration-value chain
Enlarging the geographical area/Size of operation – Economies of Scale
Product lifecycle quadrant
Consolidation in the market
Diversification
Emerging market opportunities
Brand Acquisition
Attractive valuations
Extent of leveraging
Operational leveraging
Financial leveraging
Tax leveraging
Business barriers
Knowledge base & technical know how
Tax advantages
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Agenda
Background
Aspects of a Deal
Cases
Valuation methodologies
Structuring
Regulatory issues
Tax implications
Transaction costs
Post deal challenges
Due-diligence
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Valuation Methodologies
DCF valuation
– for rigorous analysis, sensitivities
Multiples – EV/EBITDA, PE (EPS) etc
for quick and easy reference of pricing available in the market
Asset Based Valuation
cement, real estate or other capital intensive sectors
Sector specific multiples
Rs crs per MW, ton of cement production, hotel room, telecom tower etc.
Range of the valuation
optimistic and pessimistic, for negotiation purposes
Additional cash flow due to synergies arising in case of mergers
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Structuring
Financing
Debt Equity ratio – bases on industry benchmarks, profitability, bankability
Bridge loan, Mezzanine/Subordinated Debt, Overseas– ECB, FCCBs etc
Share exchange, part cash and part share
Management Control
Shareholder Agreement – RoFR, Anti dilution, Drag along, Tag along rights,
deadlock provisions, Board representation (in JVs, PE investment)
Indemnities for known risks, brand transfer etc. in the Agreement
Forming an SPV
Tax implications in different jurisdictions on dividend, interest income, capital
gain, operating income, etc
o Mauritius (incorporation status GBC I & GBC II differ in tax benefits) , DTAA
o Singapore (DTAA & FTAs, tax incentives in shipping)
o British Virgin Islands (negligible taxes)
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Regulatory Issues
Regulatory bodies
SEBI - listing requirements – duration of the whole process, open offer
RBI – debt financing, banking guidelines, ECB restrictions
Cross border related
FEMA – cross border transactions – RBI & SEBI both
FDI norms – sectoral limits
o Comes under Deptt of Industrial Policy & Promotion (DIPP) and Ministry of Commerce and Industry
Regulations of Target country in case of cross-border acquisition or listing
Sector specific
Concerned Department/Ministry – DoT, Ministry of Communications & IT etc.
Others
Accounting standards, Competition Act 2002
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Tax Implications
Foreign multinationals merge, employee at Indian Subsidiary has ESOP (of
foreign parent company), TAX ?
Indian law provides exemptions for exchange of Assets in the event of merger. Is
this exemption available for shares held in such foreign companies?
Is exemption available if consideration is received in the form of;
o Shares and Cash; Shares and Bonds; Preference shares for Equity shares or vice versa
Implications under Sec 43B and 40(a)(i) when taxes are unpaid by the
amalgamating company and subsequently paid / deducted by amalgamated
company ?
Does the foreign merger have to comply with the conditions of Section 2(1B) ?
Whether MAT credit is allowable in the hands of Amalgamated or Resulting
Company?
Meaning of ‘undertaking’ under Section 2(19AA). Whether investments in various
group companies of an investment holding company would qualify as
‘undertaking’ for the purpose of Section 2(19AA)?
How is the taxation in case acquisition price is settled by way of share swaps?
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Due- Diligence
Financial, Legal & Tax related, Technical
Potential liabilities
Warranty issues, Environmental, patent infringements, lawsuits, pending
regulatory issues
During interaction
Be Commercial
o Talk Financials only
o Allow business partners to take informed commercial decisions,
o Focus on big ticket items,
o Do not expect 100% clear data
Be prepared to know
o To know what to ask for, What to look for, What to deliver to whom and How to get there
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Transaction costs
Fess of constituents Investment banker, Legal advisor,Foreign Lawyer, Valuers, due
diligence, Bankers charges,Technical consultants,
Stamp Duty As high as 15% in many states, Max cap in some states, The relevant
law differs from state to state.
Income Tax Carry forward of business losses/depreciation, determinants of block for
IT depreciation, Sec 14A disallowance, amortisation, Sec 80IA deduction
disallowance, Goodwill disallowed
Regulatory consents SEBI, RBI, Companies Act, concerned GoI Dept, Competition Act
Controlling Interest
Premium
Premium may differ upon the % of controlling to be acquired
- 51% for management control
- 76% for ability to carry through special resolution-useful in M& A /
transfer of - business or assets
- 90% for delisting the company
Estimated time for
completion of entire
transaction
Loss of interest, manpower cost, opportunity loss etc
Experienced advisors play a crucial role
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Integration of Target company
- Business dynamics
- Growth Strategy
Increased Profitability - Effective cost
- Tangible results
Acquisition funding
Lag in gain realisation
BV-$50 pt
Replacement cost $75
MV of all assets $ 125
EV $ 150
The return has to be on EV + Other incidental costs
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Post Deal Challenges
Operational
Integration of Operations, MIS
Performance uncertainty
Financial
Accounting issues –Amortization of goodwill
Settling hidden liabilities/losses
Managerial
HR & Cultural Integration
Effective communication with all stakeholders
Displacements of leadership teams and turnover
Collusion & Cartelization – Short Term Impact
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Company XYZ
Size of deal Stakes were small High
Vendor settlement Difficult Complicated
Time lag Minimal Stretched
Valuations Due to depressed
market the eventual
cost has gone up
Attractive as per
current valuations
Rationale for
acquisition
Foot hold in state Consolidation of
operations
Acquirer Small Player Big Player
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Arcelor - Mittal
Motivations for Mittal
Leadership position in premium segment in Europe with strong R&D capabilities
Low Cost slab-manufacturing in Brazil.
Distribution network in Europe
Flat products
Motivations for Arcelor
Leadership position in Premium segment in the US.
Access to Raw Materials & upstream integration
Low cost slab manufacturing in Ukraine.
Long Products
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Arcelor - Mittal (contd..)
Jan 27, 2006
4 new company shares and cash of € 35.25 for every 5 shares in Arcelor
4 new company shares and cash of € 40 for every 5 convertible Bondholder in
Arcelor
Minimum 50% of Arcelor shares to be surrendered
75% of Commission to be in form of equity in new company & 25% in Cash
Option to Arcelor shareholders to accept 16 shares for every 15 shares of Arcelor
or receive cash € 28.21 per share fore very Arcelor Share.
Value of firm € 18.6 million
Divident to Arcelon shares holds @ € 1.85 - € 5 Million
Jun 11, 2006
Mittal revised bid value to € 25.8 billion with highs cash component
Deal closed at € 33.5 billion
Takeover Defiance - Setverstal, Russia
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Arcelor - Mittal (contd..)
Financials(USD Mn)
Mittal Arcelor Total (pre merger) Arcelor Mittal
(post merger)
2005 2006 2005 2006 2005 2006 2007 2008
Revenue 28,132 58,870 38,747 43,493 66,879 102,363 124,936 105,216
EBIDTA 6,056 9,844 6,751 7,790 12,807 17,634 18,336 19,400
Net Profit 3,795 6,086 4,305 4,820 8,100 10,906 10,439 11,850
EPS 4.79 5.28 5.94 6.2 10.73 11.48 6.78 7.41
Net Worth 13,286 42,127 17,713 25,277 30,999 67,404 55,198 56,685
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Siva Group
Background
USD 3 bn Group promoted by Mr C. Sivasankaran
o a first generation entrepreneur, known for his ability to identify business opportunities well ahead of
others
Diversified business interests
o in sectors like Telecommunications, Renewable energy, Shipping & Logistics, Hospitality & Realty,
Engineering, Food & Beverages
Early mover in broadband and mobile telephony
o Dishnet Wireless & Aircel in 1999
New Ventures
o S Tel (GSM based telecom services)
o WinWinD Oy, Finland (wind energy)
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Aircel - built and divested
Growing telecom business
Acquired licenses in 1997 to operate in Rest of Tamil Nadu (RoTN) Circle
Launched services in RoTN at revolutionary rate of Rs 1 per 3 minutes in 1999
Became leading operator in Tamil Nadu within 18 months
Acquired RPG Cellular and entered Chennai circle and became leader in 2003
Applied for licenses for 10 B & C circles in Northern and Eastern India;
o Obtained 7 licenses and launched services in 3 circles by end of 2005
Divestment
Sold Aircel to Maxis Communications for a Enterprise value of USD 1.08 bn
Amount invested - ~ USD 110 Mn with weighted average period of ~ 4.2 years
Return on Investment – 60.4% p.a
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Barista – bought and divested
Acquisition
Acquired 65% in Barista Coffee Company Ltd in April 2004
Balance 35% acquired during later part of 2004
Operated
Incurring losses when acquired due to high rentals, wastages etc
Post acquisition, systems and processes were refined to improve efficiencies
Clubbed with Fresh & Honest, an in-house coffee vending machine business
Divestment
Sold to Lavazza, an Italian Coffee major, in a packaged deal for EV of Rs 207
Crs in 2006
Amount invested - Rs 128 Crs for a weighted average of 1.6 years
Return on Investment – 27.0%
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Winwind – value creation
Acquisition
Acquired 40% in Winwind Oy, a Finland design & engineering company with
multi- megawatt manufacturing capacity (1 & 3 MW), in 2006
Increased stake to 89% during the year 2007
Operations
Set up a manufacturing facility at Chennai during 2009
Obtained ISO certification for product and service ranges during 2009
Established a new plant in Finland during 2010
Private equity
Mazdar invested Euro 120 Mn in WinWinD during Sep 2008
Substantial value created as compared to initial investment