Adani cements jumbo M&A debt

IFR Asia 1237 - 21 May 2022 - 27 May 2022
7 min read
EMEA, Asia
Prakash Chakravarti

Asia’s richest man Gautam Adani is making a splash in the debt markets with a financing package of at least US$6.6bn for his conglomerate’s planned purchase of a controlling stake in Swiss building materials firm Holcim's cement businesses in India.

Adani Group will need to tap into every conceivable liquidity source for the financing, India's largest M&A loan, at a time when turmoil has hit the global financial markets.

“Adani has a daunting task on its hands to fund this acquisition at a time when global financial markets are volatile and risk aversion is paramount,” said one senior loan banker in Hong Kong. “Successfully completing the funding for what is an important acquisition will cement its place in India Inc’s Hall of Fame and set a template for others that follow.”

Adani is no stranger to the M&A game. Last October, Adani Green Energy acquired SoftBank-backed SB Energy Holdings in a deal valued at US$3.5bn, the largest acquisition in the renewable energy sector in India, which it funded through internal accruals. It also raised a Rs72.5bn (US$1bn) bridge loan from three banks to finance Adani Airport Holding’s acquisition of a 74% stake in Mumbai International Airport, which was completed last July.

While both were domestic deals and had an onshore funding structure – at least initially – Adani’s latest jumbo acquisition features an offshore construct. An Adani family offshore special purpose vehicle is the buyer of the 63.19% stake Holcim holds – through an offshore vehicle – in Mumbai-listed Ambuja Cements, which in turn owns a 50.05% interest in ACC, another listed cement company. Holcim owns another 4.48% stake in the latter directly.

Holcim would receive nearly US$6.4bn for the stakes in both Mumbai-listed companies. Adani said it would acquire more shares through an open offer, which could take the total consideration to as much as US$10.5bn.

Funding mix

Barclays, Deutsche Bank and Standard Chartered have provided underwritten commitments and are leading the latest US dollar-denominated debt financing, which comprises a combination of senior and junior bridge and term loans for Endeavour Trade and Investment, the Adani family’s offshore SPV incorporated in Mauritius.

More banks are expected to be added to the underwriting group in the coming weeks. However, Indian banks and financial institutions will be left out as they are prohibited from financing an offshore entity’s acquisition of shares in an Indian company.

That is in contrast to another large acquisition financing from India – a US$1.2bn loan backing the purchase of assets of US-based Viatris by Biocon Biologics, a subsidiary of India-listed pharmaceuticals company Biocon. The borrowing is expected to attract a good response from Indian banks.

Adani itself won strong support from StanChart and State Bank of India when its port operating arm Mundra Port & Special Economic Zone borrowed US$2bn through a bridge loan to fund the acquisition of the Abbot Point coal terminal in Queensland, Australia, in 2011.

Coal question

Environmental issues could challenge Adani’s latest financing – a hurdle it has struggled to overcome for its controversial Carmichael coal mine in Queensland. Adani has faced a years-long campaign from climate activists against developing the thermal coal mine and resistance from lenders to fund the project, as a result of which it has scaled back its plans.

“Cement may not immediately trigger environmental concerns as coal does, but some lenders can be picky given those issues will still come up with the wider group,” said one banker in Singapore.

Another loan banker countered: “Adani also has been making efforts to improve its environmental credentials through green and ESG financings. Financiers have not stopped lending to Big Oil companies such as BP, ExxonMobil, Shell and TotalEnergies.”

The size of the debt will depend on the success of general offers for additional 26% stakes in Ambuja Cements and ACC, both of which are debt-free companies.

As at December 31, the standalone cash balance for Ambuja Cements was Rs39.85bn (US$513m), while that for ACC was Rs72.47bn.

“Both targets have ample cash on their balance sheets and also generate stable cashflows that can be leveraged,” said one senior loan banker in Singapore. “That should alleviate any concerns potential lenders might have on the risks of lending to this particular event. Moreover, the ancillary business opportunities such as capital markets takeouts that are likely to follow make this financing an attractive proposition.”

The acquisition, which will make Adani Group the second-biggest cement producer in the country, is expected to close in the second half of 2022.

If Adani raises more than US$7.5bn – the original size of a financing Bharti Airtel raised in 2010 to acquire the African assets of Kuwait's Zain Group – it will become the sixth-largest M&A loan from Asia (ex-Japan), according to Refinitiv LPC data.

Past lessons

Adani would do well to learn from the experiences of Bharti and Vedanta Resources, which raised the two largest M&A loans from India in challenging circumstances.

In November 2010, Bharti finalised its borrowing for the purchase of Zain's African cellular assets at US$6.605bn after 11 underwriters had first pre-funded the US$7.5bn borrowing in June. SBI, one of the underwriters, took a final hold of US$500m and also provided another US$1bn-equivalent through a rupee tranche.

The US$6.605bn financing managed to raise US$955m combined from seven other banks joining in syndication. The loan closed after an US$895m pre-payment from the borrower and a good nine months after the Indian telecom company first confirmed the acquisition in February 2010. The financing had to endure the fallout of the eurozone crisis that eventually saw several European lenders retreat from Asia to their home markets.

In August 2011, Vedanta raised US$5.37bn in loans to buy a 40% stake in Cairn India. The borrowing comprised a US$2.97bn syndication portion, a US$1.5bn bridge-to-bond facility, which was refinanced in May by a US$1.65bn bond, and a US$900m bridge-to-equity facility.

The syndicated portion comprising a US$1.57bn 18-month bridge loan tranche A and a US$1.4bn three-year term loan tranche B, drew participation from five banks in senior syndication, while general syndication was not launched. Only one bank in senior and one more among the eight OMLABs were European. Some European banks stayed away as they were concerned about environmental issues relating to Vedanta's businesses.