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Running For Cover

Tata Motors & Hindalco went for big-ticket acquisitions but are now grappling with funds to complete the same

This is the story of two kings who built their empires after years of hard effort but, both kings are now struggling to hold on. The kings we are talking about here are, Mr. Ratan Tata of Tata Motors and Mr. Kumar Mangalam Birla of Hindalco.

Mr. Birla in 2007 followed by Mr. Tata early this year, set their sights on foreign companies and as kings, got what they wanted. In other words, Hindalco acquired Novelis while Tata Motors acquired Jaguar-Land Rover (JLR). Now both are having a tough time looking for funds.

And why are they convincing their shareholders for equity dilution? It's because of the significant and drastic fall in the market value of these empires. Significant, as the acquiree was bigger in size than the acquirer; this certainly strained the investors' financials. And drastic, as neither of the two kings had ever imagined that the markets would scale back so fast.

First let's talk about Hindalco's acquisition of Novelis. The cost of acquisition, including Novelis' debt of $2.4 billion, was pegged at around $5.9 billion. Novelis has a bridge loan of $3 billion, and has to pay $1.4 billion to bond holders next year. Refinancing of that loan is now a concern for Hindalco's management as equity markets are slowing, credit is getting tight and sky rocketing domestic interest rates have made the job difficult. Consequently, Hindalco had to reconsider the rights issue from an earlier (1 share for every 3 held), to the sweetened position of 3:7 (3 shares for every 7 held).

The problem for Birlas and Tatas is that their net worth has come down from the time of the acquisitions. Investors are ready to pay the risk premium till the time it is worth it on their scales. But when the company itself experiences significant value erosion, investors turn skeptical about company's existence. Take for example Hindalco, which completed Novelis' acquisition formalities in May last year. At that time, the shareholders' worth was Rs 17,000 crore ($4.25 billion), the shareholders' worth touched Rs 26,000 crore ($6.25 billion) in December 2007. However, the shareholders' worth as on August 21, 2008 stood at Rs 15,800 crore ($3.95 billion.)

Tata Motors' has to mop up $2.3 billion for JLR acquisition. Earlier plan was to issue convertible preference shares to finance the two brands it bought from Ford Motors in March 2008. But now with weak market, it will raise Rs. 3,000 crore through a phased disinvestment of certain investments over a period of 6-8 months. Tata Motors plan to raise Rs 7,200 crore through three different rights issues has also now changed to raising Rs 4,200 crore through two different rights issues.

Moreover, it seems that this is just the beginning.With current sentiments its doubtful if it can raise through the first leg of equity dilution; the situation will only get more precarious for the shareholders, in the coming times.