Deal Structuring Financing Acquisitions

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					^Deal Structuring & Financing Acquisitions
 April 2011

                         Private & Confidential
^Deal Structuring is of paramount importance

         REGULATORY         • Open offer requirements, ownership norms, capitalization
        CONSIDERATIONS        norms

                            • Capital gains impact to sellers, stamp duty and sales tax
                              issues, availability of past tax losses

                            • Ability to consolidate, goodwill impact, provisioning in the
                              balance sheet, purchase consideration break-up between

                            • Cost of capital, availability of funds on target vs acquirer
                              balance sheet, tax benefit for interest expense, Cross-
                              border jurisdictions

          DEAL TIMING       • Implementation time to financial closure

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^ Commonly Used Deal Structures

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^Transaction Structures| Stock Purchase


                                                  Target Stock


              Benefits                          Some Potential Issues                          Recent Examples

   • Simple and quick to                 • May lead to tender offer                     • Vodafone’s acquisition of
     execute                               requirements                                   the equity from Essar in its
   • Minimal transaction costs           • Potential capital gains                        telecom business
   • Pricing benchmarks are                implication for the seller                   • Mahindra’s acquisition of
     easier to establish                 • Inability to cherry pick select                shares in Satyam Computers
                                           assets of the business                       • Emami’s acquisition of
                                                                                          shares in Zandu

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^Transaction Structures| Asset Purchase

                                        Target                                     Acquiror
                                     Shareholders                                Shareholders

                                        Target              Cash                   Acquiror
                                        Corp.                                       Corp.
                                                      Target Assets


               Benefits                             Some Potential Issues                              Recent Examples
   • Fairly quick to execute                 • Potential implications of stamp                  • Schneiders’ purchase of
   • Ability to cherry pick assets             duty and sales tax                                 the cabling business of
     (or a specific business)                • Cash inflow into the company                       Smartlink
   • No tender offer requirements              and not to the shareholders                      • Indo Asian Fusegear –
   • Could be slump sale or                                                                       Legrand
     piecemeal transaction of                                                                   • Abbott’s purchase of
     assets                                                                                       Domestic Formulations
                                                                                                  business of Piramal’s

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^Transaction Structures| Mergers

                               shareholders                                     company’s

                                                    Cash and/or other                         ABC
                                                      consideration                           stock

                                Acquiring                            (merged)
                              company XYZ                         company ABC
                                                Cash and/or other   (dissolved)

               Benefits                           Some Potential Issues                               Recent Examples

   • Ability to consolidate                   • Time consuming – needs                         • Centurion Bank of Punjab
     operations into a single entity            court approvals                                  with HDFC Bank
   • Ideal in situations like JVs             • Needs approval of lenders                      • Bank of Rajasthan with
     wherein existing shareholders              and majority shareholders                        ICICI Bank
     wish to continue
   • Variants include reverse
     mergers and demergers

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^ Financing Acquisitions

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^Some Key Considerations

                           Sources of Financing

                           Forms of Financing

                            Cost of Financing

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^Sources of Financing

                                  Sources of Finance

                     Commercial        Finance                 Long term       Venture        Leveraged
   Buyer    Seller
                       Banks          Companies                 Finance      Capital Firms   Buyout Funds

                                                     Insurance             Pension
                                                     Companies              Funds

                                      Private & Confidential
^Financing Considerations Differ

                         The buyer / management team provide the most critical portion of
                         the transaction

     Management/         The amount of principal a buyer invests often dictates
     Buyer                     The capital structure of the transaction
                               The terms of the transaction
                               The types of lenders that will participate

                         Seller may finance part of the transaction if the seller receives a
                         premium over an all cash price
     Seller of Target    Seller may be willing to take back long term, subordinated debt and
                         occasionally preferred stock
                         Earn-out arrangements are also used for compensation

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^Financing Forms | Characteristics

                                              DEBT                             EQUITY
   Tax deductible finance costs     X                        X

   Covenants/ Restrictions          X                        X

   Convertibility features                   X(In specific cases)       X

   Dilution of Ownership                     X(In specific cases)       X                 X

   No required fixed payments                                                             X

   Base for leverage                                                    X                 X

   Not subject to redemption                                                              X

   Cost of financing               Low                  Higher        Higher            Highest

   EPS dilution of shares                   X (In specific cases)       X                 X

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^Financing Forms | Other Financial Instruments

                          Debt securities with attached or detachable equity warrants
     Debt with Warrants
                          Gives the debt holder participation in the future performance of the company

                          High-yield, high risk securities
     Junk Bonds
                          General obligation bonds that have credit ratings below investment grade

                          Debt securities with interest and /or principal payable in cash or securities of
     Paid-in-Kind Debt
                          the issuer at the issuer's option

     Paid-in-kind         Preferred Stock which pays dividends in cash and /or additional shares of
     Securities           preferred stock at the issuer's option

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^Financing Forms | Other Financial Instruments

     Adjustable Rate        Preferred stock with interest rates that are reset at periodic auctions
     Preferred Stock

     Debt securities with   Investors retain put option
     put option

     Alphabet / Tracking    Investors hold a company's stock but the shares participate only in the
                            earnings of a specified subsidiary or group of assets

     Sale-lease back        Similar to Senior Debt
                            Complicated as to who receives the risk/benefit of the residual value

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^Acquisition Finance (Debt) | Structuring

       Company’s Perspective                                                      •   Lender ‘s Perspective
         Minimum equity contribution                                                    Adequate security with commensurate
         Appropriate leveraging through an optimal funding                              return
         structure balancing cost and risk                                              Protection against default
         Limited recourse to parent for repayment - Ring                                Promoter comfort and contribution
         fencing liability associated with acquisition


      Myriad transaction specific structuring options available
      Different contemporary financial instruments for funding the acquisition including debt, mezzanine and equity
      Indian and offshore laws and regulations relating to acquisition, tax and investment


  •   Target Vs Acquirer (Leveraged Vs Own Balance Sheet)
  •   Recourse Vs Non-Recourse
  •   Off-shore Vs On-shore SPV

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^Acquisition Finance (Debt) | Challenges

 Objective            Issues / Challenges
 Optimizing Cost      •   To minimize the Financing cost

                      •   To minimize Transactions Costs like DD cost, Legal cost etc.

                      •   To minimize Future Costs like Prepayment penalty, Commitment charges, Penal interest etc

 Structuring the      • To finalize the best suitable Financing instrument and provide the most appropriate Security
 Transaction most
 appropriately        • To choose the best suitable Jurisdiction and most optimal Borrowing Vehicle
                      • To negotiate the Financial Covenants / other Restrictive covenants
                      • To structure the Repayment schedule as per the Cash flow
                      • To minimize the various kind of Tax (Withholding, Dividend Distribution, Income Tax etc.)

 Finding the most     • To decide the most suitable Lender from a long term perspective
 suitable Lender
                      • Whether to go for a Bilateral loan or Syndicated loan

 Timely completion    • To complete the Transaction in a Short Time especially when there are multiple bidders for
 of the Transaction
 / Synchronize the        the Target
 entire process       • To coordinate across different geographies, lenders and various advisors

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^Case Study - Acquisition Finance for L.T. Overseas Ltd. (1/2)

                               Business Acquisition
                                   USD 20 Mn

   L T Overseas Ltd.                   Kusha, INC.                              Strategic Opportunity

    • One of the largest              • The largest basmati rice                • Kusha has provided the marketing
     basmati rice players in            marketing and distribution               and distribution platform for LT
     India with a topline of            company in the US, with                  Overseas’ brands
     ~USD 120 Mn                        revenue of ~ USD 40 Mn                  • With its milling and product
    • Owner of “Dawaat” and           • Has portfolio of strong brands,          development capabilities, LT
     “Heritage” brands                  “Royal” and “Pari”, with 40%             Overseas will be able to launch high
                                        market share in the US                   value add products in the US market
                                        basmati rice industry                   • LT Overseas became the largest
                                                                                 basmati player in the US

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^Case Study - Acquisition Finance for L.T. Overseas Ltd. (2/2)
                                                                       ‘DEBT TO OFFSHORE SPV WITH RECOURSE’

   Lending Bank           Rupee                                        The Lending Bank, through its offshore operations,
                          Loan of         Acquirer
 India Operations                                                      extended US$ 13 million financial assistance to
                          Rs. 80
                          million                                      facilitate acquisition of the Target
                                                 OFFHORE                        Extended additional US$ 2 million to the Indian
                                                                                operations through its Indian Balance Sheet
                                      Equity Investment                         Loan extended infused as Equity in the US SPV
                                        US$ 2 million
                                                                                Pledge of SPV and Target’s shares
 Lending Bank –       Senior Debt       Acquirer SPV                            Corporate Guarantee of the Indian Parent
 Offshore Branch        US$ 13             USA
                        million                                                 Pledge of Promoters’ shareholders in the Indian
                                                                                Parent company
                                         Acquisition                            Mortgage of Target company brands
                                    Consideration for 100%
    Cash flow                                                                   Cash flow accrued at the Target level
   available for
  Acquirer to be                           Target                               Undertaking to capitalize the USA operations, if
    utilized for                            USA
  debt servicing
                                                                       Time taken to conclude the financing : 2 months

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^ Contact Details

  Executive Director
  Direct: +91 11 4535 7501
  Cell: +91 98110 55333

                                                                 Avendus Capital Pvt. Ltd.

Mumbai                                 Bangalore                              New Delhi                 New York                    London
IL& FS Financial Centre                # 1 & 2, The Millenia                  Suite 22A/B, The Aman     100 Park Avenue, 16th fl.   32 Brook Street
B Quad, 5th fl, Bandra Kurla Complex   Tower A, 10th Fl, Murphy Road,         Lodhi Road                New York                    London W1K 5DL, UK
Bandra East, Mumbai, India 400051      Ulsoor, Bangalore, India 560001        New Delhi – 110003        NY 10017                    Phone: +44 20 7647 7700
Phone: +91-22-6648 0050 / 0950         Phone: +91-80-4115 0000                Phone: +91-11-4535 7500   Phone: +1-212-351 5066      Fax: +44 20 7647 7710
Fax: +91-22-6648 0040 / 0940           Fax: +91-80-2555 0868                                            Fax: +1-484-231 2343

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