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India Inc is on shopping spree, but how much cash really changes hands?

The big acquisitions are often complexly structured; stock, debt and convertible warrant components substantially reduce the cash proportion

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Corporate India can’t stop buying. Almost no week goes by without the announcement of a mega acquisition. The recent past alone saw two such deals: Reliance Retail’s purchase of a controlling stake in directory services provider JustDial, and Byju’s acquisition of US-based reading app Epic.

Some of the deals are forged because it makes strategic sense to do so (example: Tata Sons’ purchase of Big Basket), others because the targets may hold attractive assets (such as Japanese firm Orix’s purchase of a stake in Greenko).

Certain acquisitions — referred to as ‘acqui-hiring’ — are made exclusively because the buyer is keen on taking on its payroll employees with desirable skillsets, or even one particular employee (often the founder). For instance, TCS recently purchased the IT operations of its long-term client Virgin Atlantic, taking on board its 70 tech employees.

Yet others are made via the bankruptcy process, where companies buy other stressed companies, or some of their operations, through a carefully structured legal process. Piramal’s acquisition of Dewan Housing Finance Ltd (DHFL) through a process defined by the Insolvency and Bankruptcy Code (IBC) would be a prime example.

No two deals are alike

What’s interesting is the sheer variety — and complexity — of payment structures adopted for the acquisitions. Down payment of cash, it would appear, is passé. Most of the recent M&A deals have gone for the cash-and-stock route in various proportions, the latter often outweighing the former.

Also read: Reliance & Just Dial: Apples and oranges or a symbiotic win-win deal?

Even when there is cash, it is sometimes as milestone payments, wherein the target company gets the amount only when it achieves certain targets. Also, the stock component is often routed through convertible warrants, so that the sellers are left with documents that may fetch them shares in the future.

A brief glance at some of the big deals in the recent past illustrates how companies increasingly plan the structuring of a deal — it’s not only about tax efficiency and expenses management but also about getting the best strategic value out of the transaction.

Reliance’s acquisition of Future Retail

Reliance Industries Ltd’s (RIL) acquisition of Future Retail — announced last year but yet to be implemented due to legal issues — is perhaps one of India Inc’s most complex deals in recent times.

Under the deal, RIL, through its subsidiary Reliance Retail Ventures Ltd, would acquire key businesses of the Future Group as a going concern, on a slum-sale basis, for ₹24,713 crore.

There are multitude layers to the deal, involving re-organisation of subsidiaries, stock swaps, cash payments, debt assumptions, warrant issuances and listing changes. When the deal culminates, the Future Group will retain just 31% of its existing business, while RIL will take over the balance 69%.

While the deal is technically a ‘slump’ sale, it presents a viable route for debt-ridden Future Group to get back on its feet. Analysts do caution that Future Group shareholders may not benefit much. “The existing Future Group shareholders’ share-swap deal indicates an about 50% upside arbitrage,” said Motilal Oswal in a note. “However, the residual business, following the slump sale and equity infusion adjustments, leaves merely ₹4.2 billion EBITDA, with net debt of ₹23 billion…This is against a 96% dilution from the share-swap deal at other Future Group entities, leaving nothing on the table for existing minority shareholders.”

Surprisingly, the opposition to the deal came not from the shareholders but from rival Amazon Inc, which has called it anti-competitive and gone on a legal battle to stop it.

PharmEasy’s acquisition of Thyrocare: Cash is king

Last month, in an ‘audacious move’, online pharmacy start-up PharmEasy said it would buy a majority stake in Thyrocare, a publicly listed diagnostics firm, for ₹4,546 crore. Under the deal, PharmEasy would buy a 66% stake from Thyrocare promoter A Velumani and also make the mandatory open offer to public shareholders.

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The open offer is likely to sail through, going by analyst recommendations. “While the market cap of Thyrocare was ₹75.5 billion (per closing price on June 25, 2021), PharmEasy valued Thyrocare at ₹68.7 billion…” said a note from brokerage house Prabhudas Lilladher. “…the stock price reflects more than full value of the deal and hence, it is beneficial for shareholders to monetise the opportunity at current market price with base price support of the open offer price.”

There was also a small stock component to the deal, though unrelated. Velumani was given the option to buy a nearly 5% stake in Pharmeasy for about ₹1,500 crore as the start-up firmed up another round of private equity financing.

A rather unique option the M&A deal throws up is for Pharmeasy to get a quick listing on the stock exchanges. It may get a regulatory bypass through Thyrocare, which is already listed. The company is reportedly looking at options such as dual listing and reverse listing to make use of the leeway.

Byju’s acquisition of Aakash: Stock answers

When edutech major Byju’s is not in the news for its multi-million-dollar fund-raising, it is for its equally big acquisitions. While it opted for cash-only deals for its smaller buys such as HashLearn and WhiteHat Jr, its $500 million purchase of US-based reading platform Epic is a cash-and-stock deal.

Its $950-million cash-and-stock acquisition of Aakash Educational Services in the beginning of this year is particularly interesting. Byju’s bought out Aakash’s founders and private equity investor Blackstone from company. While the founders got cash, Blackstone got some cash as well as Byju’s stock for its nearly 38% stake in Aakash.

This way, Byju’s saved on some cash outgo, while Blackstone swapped some of its money in a 33-year-old brick-and-mortar test preparation institute for a edtech unicorn that has been blazing a trail since the pandemic began.

Stock vs cash: The trade-off

The stock component can help the buyer ease liquidity constraints while making the acquisition. For the seller, it may or may not be beneficial depending on how the buyer’s shares perform after the deal.

While legal, tax and transaction consultants today vouch for stock-and-cash payment structures, some traditionalists in the respective fields may beg to differ.

“In a cash deal, the roles of the two parties are clear-cut, but in a stock deal, it’s less clear who is the buyer and who is the seller,” observed economist Alfred Rappaport and M&A strategist Mark L Sirower in an article in the Harvard Business Review.

“In cash transactions, acquiring shareholders take on the entire risk that the expected synergy value embedded in the acquisition premium will not materialise. In stock transactions, that risk is shared with selling shareholders. More precisely, in stock transactions, the synergy risk is shared in proportion to the percentage of the combined company the acquiring and selling shareholders each will own,” they said.

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