New Delhi, April 22: India Inc will increasingly go for leveraged buyouts (LBOs) to finance its acquisitions, according to analysts.

“This is the only way for smaller Indian companies to acquire businesses that are often two-three times larger than their balance sheet size,” Krishnan Sitaraman, head of financial sector ratings, Crisil, said. Such buyouts are useful to companies that are short of internal reserves to fund a takeover, he added.

LBOs allow acquisitions with less of equity and more of borrowed funds — to the extent of even 90-95 per cent of the deal value — that are secured against the assets of the target company.

Tata Steel set the LBO trend with its $11.3-billion winning bid for the Anglo-Dutch steel maker Corus in January 31. Hindalco followed suit with its takeover of Novelis for $6 billion less than a fortnight later on February 11.

Kohlberg Kravis Roberts & Company struck the largest LBO of 2006 when it bought Flextronics in April.

“As Indian firms aspire to spread their areas of operations onto the global scenario and gain scale by taking over foreign firms, LBO emerges as the most appropriate tool to finance acquisitions of companies far larger in size,” Sitaraman said.

Analysts said companies find LBOs attractive because they shell out a minor percentage of their own resources on the transaction. “By paying only 30 to 40 per cent of the purchase price, the equity holders gain control of the target company,” equity analysts said.

Sitaraman said the company’s liability is limited to the equity in the special purpose vehicle (SPV) set up to take on the debt.

However, since the debts are usually leveraged against the future earnings of the target company, they are for a long period, he added.

The Tatas, who financed the $450-million takeover of UK’s Tetley seven years ago through LBO, are still paying off the debts.

He said the higher debt-equity ratio weakens the balance sheet of the acquiring company, but this can be overcome by the synergies from the deal.

Analysts at ICICIdirect.com said the success of an LBO depends on how seamlessly the companies merge.