Tata Steel will shell out $4.1 billion out of the total consideration of $12.15 billion for the acquisition of Anglo-Dutch steelmaker Corus.
NA Soonawala, Tata Sons director, said at a press conference in Mumbai on Wednesday that Tata Sons would soon be subscribing to a preferential allotment of equity shares to be made by Tata Steel, for infusing funds into the latter.
The remaining $8 billion required to close the deal is expected to be raised by a special purpose vehicle (SPV) created in the UK, called Tata Steel UK.
Tata Steel's $4.1 billion contribution will serve as the equity capital of Tata Steel UK. This will be raised by Tata Steel through a combination of debt and equity.
This will be the second time in recent months that Tata Sons will be infusing money into Tata Steel through a preferential allotment. The first issue took place in July 2006.
According to Soonawala, the dilution of the Tata Steel equity, currently at Rs 580 crore (Rs 5.80 billion), will not be very large. "We cannot put all the load on Tata Steel," the Tata Sons director said.
He observed that much of the debt to be raised for the acquisition would be "ringfenced" in the SPV and maintained at a level that could be serviced by the cash flows of Corus.
It is not immediately clear whether the lenders to the SPV will have recourse to the Tata Steel balance sheet. While on a consolidated basis, there will be a considerable increase in the combined entity's exposure to debt, Soonawala maintained that the additional debt raised on the books of Tata Steel would not materially affect the earnings potential of the company.
Koushik Chatterjee, Tata Steel's vice-president (finance), said the debt-equity ratio of the SPV would not change very much from the level envisaged at the time when the Tata bid for Corus was 445 pence.
On current reckoning , it should be around 2:1. Tata Steel's cash and cash equivalents are currently in the region of Rs 4, 500 crore while the debt-equity ratio is 0.26:1.
Chatterjee said while the targeted debt-equity ratio for Tata Steel in the long term was 1:1, in the immediate term the debt-equity ratio could be much higher , because of the increased borrowings being made to fund the acquisition.
In July 2006, Tata Sons was issued 2.7 crore (27 million) shares of Rs 10 each at a price of Rs 516 per share aggregating Rs 1,393 crore (Rs 13.93 billion).
In addition, Tata Sons was issued 2.85 crore (Rs 285 million) warrants where each warrant would entitle it to subscribe to one ordinary share of Tata Steel against payment in cash. An amount equivalent of 10 per cent of the share price, ie Rs 51.60 has been received by Tata Steel. The price at which the warrants will be converted will be determined in accordance with the Sebi formula at the time of exercise.
Meanwhile, Tata Steel will be paying 608 pence per share to acquire Corus Steel, a price almost one-third higher than the 455 pence price Tatas offered in the beginning of the deal. CSFB, which is the banker for Corus, has stepped in the form of staple financing to help the Tata group raise funds for the acquisition.
CSFB will now fund 45 per cent of the debt component of the deal. The remaining 55 per cent will be equally organised by Deutsche Bank and ABN Amro," said a source.
Standard Chartered Bank, which had agreed to provide $375.24 million subordinated debt financing for the acquisition, has agreed to step up funding by another $1 billion.