RCL needs $21b to buy 100% in Hutch

The sum required is around $21 billion, if Anil Ambani wants to buy out 100% of HTIL. This is an acquisition, and not a merger. So offering RCL stock in exchange for HTIL share may not be possible. In other words, current owners of HTIL — Hutchison Whampoa or say Essar Group — may want cash. This makes the whole situation different.

RCL at this point has a balance sheet size of around Rs 36,508 crore or $8.2 billion at the end of September 2006. In this, there was cash of around Rs 10,308 crore or $2.32 billion. RCL’s debt equity ratio is 0.7, with total equity of over Rs 18,200 crore and debt of over Rs 12,300 crore.

RCL is in an investment mode in its own business. Analyst reports suggest that RCL will be investing around $2 billion per year for the next two to three years. Its own operations will generate operating cash flow of roughly an equal amount. So overall, RCL may at best be able to put up $2 billion at this moment.

That leaves a gap of about $19 billion, which may have to be raised from outside, if the deal has to be closed within the near future. This is twice the current balance sheet size. No company would like to triple its balance sheet overnight, whichever combination of debt and equity one may look at.

Mr Ambani has already indicated that a special purpose vehicle (SPV) would be the preferred route. This means RCL directly would not try to acquire HTIL, but through an SPV, in which RCL could have 100% or less stake. This SPV would raise the required $21 billion or so, to close the deal.

An SPV offers great financial flexibility in such a situation. For example, take the equity component.

The Reliance-ADAG can choose to invest 100% of the equity portion, or invite co-investors right upfront. Or, it can invest 100% of the equity initially, and dilute to a strategic or financial investor later. Two private equity giants — Blackstone and Carlyle — are already a part of ADAG’s consortium.

These are big private equity funds with the ability to put serious money into any transaction. Plus, four large global banks — Citibank, Deutsche Bank, UBS and Barclays — have already committed about $5 billion each to the transaction. These commitments are exclusive, which means that they won’t work with anybody else.

Another major advantage of SPVs is the ability to raise debt at substantially higher debt/equity than you would normally do in a listed company. Called leveraged buyout (LBO), here the D/E can be as much as 9:1. LBOs become possible in an SPV situation as cash flow of the target company can be pledged as collateral for the debt raised.

The sum required is around $21 billion, if Anil Ambani wants to buy out 100% of HTIL. This is an acquisition, and not a merger. So offering RCL stock in exchange for HTIL share may not be possible. In other words, current owners of HTIL — Hutchison Whampoa or say Essar Group — may want cash. This makes the whole situation different.

RCL at this point has a balance sheet size of around Rs 36,508 crore or $8.2 billion at the end of September 2006. In this, there was cash of around Rs 10,308 crore or $2.32 billion. RCL’s debt equity ratio is 0.7, with total equity of over Rs 18,200 crore and debt of over Rs 12,300 crore.

RCL is in an investment mode in its own business. Analyst reports suggest that RCL will be investing around $2 billion per year for the next two to three years. Its own operations will generate operating cash flow of roughly an equal amount. So overall, RCL may at best be able to put up $2 billion at this moment.

That leaves a gap of about $19 billion, which may have to be raised from outside, if the deal has to be closed within the near future. This is twice the current balance sheet size. No company would like to triple its balance sheet overnight, whichever combination of debt and equity one may look at.

Mr Ambani has already indicated that a special purpose vehicle (SPV) would be the preferred route. This means RCL directly would not try to acquire HTIL, but through an SPV, in which RCL could have 100% or less stake. This SPV would raise the required $21 billion or so, to close the deal.

An SPV offers great financial flexibility in such a situation. For example, take the equity component.

The Reliance-ADAG can choose to invest 100% of the equity portion, or invite co-investors right upfront. Or, it can invest 100% of the equity initially, and dilute to a strategic or financial investor later. Two private equity giants — Blackstone and Carlyle — are already a part of ADAG’s consortium.

These are big private equity funds with the ability to put serious money into any transaction. Plus, four large global banks — Citibank, Deutsche Bank, UBS and Barclays — have already committed about $5 billion each to the transaction. These commitments are exclusive, which means that they won’t work with anybody else.

Another major advantage of SPVs is the ability to raise debt at substantially higher debt/equity than you would normally do in a listed company. Called leveraged buyout (LBO), here the D/E can be as much as 9:1. LBOs become possible in an SPV situation as cash flow of the target company can be pledged as collateral for the debt raised.