October 19, 2016

Staying as tenant in your own house

Overleverage kills... always and very badly. 

Expect to see proud and mighty corporates sell off their best assets.

The $13 billion deal to sell 98 percent of Essar Oil to Russia’s Rosneft, Trifigura, and United Capital Partners, announced on Saturday by the Ruias, is one more piece of evidence that India’s over-leveraged businesses are having to sell their crown jewels in order to remain afloat. It is further proof that Indian conglomerates will have to shrink before they can grow again.

A few days ago, over-leveraged Anil Ambani inked a pact to sell 51 percent of the tower assets of his telecom company Reliance Communications (RCom) to Brookfield for Rs 11,000 crore. While the deal may take some time to consummate, essentially it will convert the owner of the towers (ie, RCom) into a tenant. RCom will be using the same towers for running its network and pay lease rents. Again, a case of giving up your crown jewels to reduce debt.

In July, the Aditya Birla Group sealed a deal to buy debt-burdened Jaiprakash Group’s 17.2 million tonnes of cement capacity for an enterprise value of Rs 16,189 crore. Again, this was a case of a forced firesale. Asked why he was selling his best businesses, Jaiprakash Group Executive Chairman and CEO told ET Magazine in an interview: “In tough times only good things go. That pain of selling some of our best assets will be there for life.”

Vijay Mallya, who managed to crash-land Kingfisher in 2011, has lost not one but two of his crown jewels, United Spirits, which is now controlled by Diageo, and United Breweries, which is now controlled by Heineken. And all because he over-leveraged himself in trying to run a thin-margin vanity business like airlines using money from his cash-generating booze businesses. Folly comes in many shapes and sizes and Mallya is now unable to return to India to face the music.


Source: http://swarajyamag.com/business/how-debt-forced-ruias-to-downsize-other-conglomerates-also-in-tailspin

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