Financing plan of India’s largest ever foreign acquisition is getting complicated. Last year Tata Steel started negotiation with 455 pence a share and ended inking 607 pence a share deal after a tough fight with Brazilian steel-maker CSN.
CSN compelled Tata Steel to bail out 1.5 billion pound more which made the cost of total deal to 6.7 billion pounds.
Initially Tata Steel decided to finance the total bill through a mixture of equity fund and debt. ABN Amro, Credit Suisse and Deutsche Bank were major debt suppliers. The company and its parent body Tata Sons, managed equity fund. Tata Sons even sold a part holding in TCS, a brother concern of tata Steel. And total accumulated equity fund accounted for 34% of total deal value.
But that created different complicacy. A considerable amount of debt in the deal value has created long-term liquidity risk. Along with that profitability will be affected. Majority of the earning will go in debt servicing.
Already international proclaimed rating agency S&P has warned the company regarding that. As per S&P, if deal goes on like this rating for the company will go down to BBB. And that will again make borrowing difficult and costly for Tata Steel.
Under such situation, Tata Steel and its advisors in acquisition deal are thinking again to increase of the percentage of equity contribution in the deal value. Issuing rights, GDR, preference shares are various available options. But any of these avenues will dilute Tata Sons stake in the Company if they decide not to buy any more of fresh issues.
Only possible breather in current situation would be increasing global steel price. This will not only increase cash flow but also will make deal more profitable.
