Changing trends - Domestic deal momentum continues to score over cross border activity

Wednesday, July 11, 2012 | Posted by: Grant Thornton
Categories: India, India Watch Issue 17 | Tags: mergers, sectors, M&A 2012, Domestic Deals 2012, Internal restructuring, private equity 2012, deals 2012, india mergers and acquisitions 2012, Private equity

Q2 2012 saw domestic deal activity reinforcing local belief in the India growth story by clocking a total of 89 deals, amounting to USD 1.3 billion, as against 86 deals at USD 1 billion for the corresponding quarter in 2011. Cross border deal activity, however, mirrored ongoing global woes and economic uncertainty, to notch up only USD 5.1 billion worth of deals for the quarter as against USD 11 billion worth of deals for Q2 2011. Private Equity for the quarter also saw a fall, clocking up USD 1.8 billion in deal value, as against USD 2.9 billion for the corresponding 2011 quarter.

Deal summary: April – June 2012

                                                                             

Q2 Deal Summary	Volume			Value (USD billion)
Year	2010	2011	2012	2010	2011	2012
Inbound	21	32	41	4.29	6.74	3.61
Outbound	62	53	24	4.63	4.26	1.46
Cross Border	83	85	65	8.92	11.00	5.07
Domestic & Internal Restructuring	114	86	89	2.53	1.00	1.26
M&A	197	171	154	11.45	12.00	6.32
PE	66	120	102	1.39	2.90	1.80
QIP	17	2	1	1.69	0.13	0.00
Grand Total	280	293	257	14.53	15.03	8.12

 

April – June 2012 M&A dealscape

M&A deal values for Q2 2012 registered an overall decrease of about 47% from Q2 2011 at USD 6.32 billion, with the fall being attributable to a considerable dip in cross border deal activity, despite sustained momentum in domestic M&A.

Cross border M&A deal values in Q2 2012 fell about 54% vis-à-vis 2011 levels for the same quarter. Structurally high food inflation, high interest rates, slowing GDP, and poor governance and policy paralysis have contributed to an under-whelming outlook for India for the short term, causing foreign entities to put their India investment plans on hold. Similarly, the continued European Union worries that spooked investors throughout the quarter, along with speculation of a ‘Grexit’, the spectre of widespread defaults and volatile stock markets, could have proved a deterrent, at-least in the near future, to Indian companies looking to acquire targets abroad.

Domestic deal activity continued to show resilience, posting a 26% increase in deal values in Q2 2012 as compared to Q2 2011 levels.

M&A Sector Focus

Top M&A Deals: Q1 2012

Acquirer	Target	Sector	Domestic/ Cross border	USD Million
HongKong and Shanghai Banking Corp	The Royal Bank of Scotland – Retail & commercial banking businesses in India	Banking & Financial services	Inbound	1,895
Primal Healthcare Ltd	Decision Resources Group	Pharma, Healthcare & Biotech	Outbound	680.00
Mitsui Sumitomo Insurance Company Ltd	Max New York Life Insurance Company Ltd	Banking & Financial Services	Inbound	530
India Hospitality Corp	Adelie Food Holdings Ltd	FMCG, Food & Beverages	Outbound	350
Sony Pictures Television	Multi Screen Media	Media, Entertainment & Publishing	Inbound	271
Roquette Freres	Riddhi Siddhi Corn Processing Private Limited – Starch business of Riddhi Siddhi Gluco Bids	FMCG, Food & Beverages	Inbound	190
Ybrant Digital Ltd	PriceGrabber, LowerMyBills, ClassesUSA.com	IT & ITeS	Outbound	175
Bharti Airtel	Qualcomm India Pvt.Ltd	Telecom	Domestic	165
Fairfax Financial Holdings Ltd	Thomas Cook – India operations	Travel & Tourism	Inbound	163
Aditya Birla Nuvo Ltd	Pantaloon Retail India Ltd (PRIL) – Pantaloon format of business	Retail	Domestic	160

 

Banking and financial services (BFSI) contributed 39% of deal activity by value in Q2 2012, followed by pharma, healthcare and biotech (12%), FMCG, food and beverages (9%), IT and ITES (8%) and media, entertainment and publishing (6%).

The BFSI sector’s performance was spurred by two cross border deals - Mitsui Sumitomo’ strategic stake purchase in Max New York Life Insurance Ltd for about USD 530 million, and HSBC’S deal to buy the Indian retail and commercial banking businesses of Royal Bank of Scotland for USD 1,895 million. Factors such as the extended timelines to obtain branch licenses from the Reserve Bank of India by foreign banks, low banking and financial services penetration in the country and fundamental growth opportunities in the Indian economy have made the Indian BFSI sector an avenue for both domestic consolidation and foreign interest. However, the sector has also seen some stress in the form of deteriorating asset quality due to bad loans to sectors such as aviation, and domestic and overseas liquidity constraints. It will be interesting to watch how the sector performs in terms of deal activity in the second half of 2012.

The biggest deal in the pharma, healthcare and biotech sector was Piramal Healthcare Limited’s acquisition of the US based Decision Resources Group for approximately USD 680 million. The impending patent cliff in the US, as well as rising research costs, lower drug approval rates and mounting regulatory pressures in the developed markets have long been considered to fuel Indian M&A activity in the pharmaceutical sector.

The Indian media, entertainment and publishing sector has demonstrated growth in the last few years due to headroom provided by rising disposable incomes, strong consumption in tier two and three cities, under-penetration and the fast-growing new media businesses. It is therefore not surprising that the sector saw players such as Eros International Plc and Sony Pictures Television increasing their stake in Indian entities.

The FMCG, food and beverages sector saw an interesting deal in India Hospitality Corp’s acquisition of Adelie Food Holdings Ltd, a ready-to-eat food products supplier in the UK, for a reported USD 350 million, signaling the readiness of Indian companies to establish a global presence.

Other sectors such as oil and gas, which were top performers in Q2 2011, have shown muted performance in the corresponding 2012 quarter. This could be attributed to the current policy regime and the failure of some projects to obtain clearances from several ministries such as environment and forests, and defence.

Other sectors such as power and aviation are expected to see heightened deal activity from the second half of the year onwards, the former being driven by attractive asset valuations, and the latter by potential government measures to ease FDI. The retail sector could also see heightened activity once clarity is achieved on FDI in multi brand retail.

The above deal rationales demonstrate that whilst cross border activity might have slowed down significantly, India’s fundamental growth story remains strong. Ironing out governance and structural issues could give the dealscape a much needed shot in the arm.

Private Equity: Signs of a cautious slowdown
Private Equity (PE) for Q2 2012 fell by 38% to total USD 1.8 billion, as compared to USD 2.9 billion for Q2 2011. The total deal values for Q2 2012 have also registered a fall as compared to Q1 2012, which saw USD 2 billion worth of deals. While it may be too early to draw a conclusive trend for PE for 2012, it seems that PE investments have temporarily slowed down, most likely due to the economic and regulatory uncertainties currently clouding India.

Top sectors for PE in the quarter included IT & ITES (18%), pharma, healthcare and biotech (15%), power and energy (14%), BFSI (13%) and hospitality (8%). However, PE investors who look at long term returns, have also invested in those sectors of the Indian economy that currently have a huge demand and supply mismatch (power and energy), and massive potential due to a burgeoning middle class with rising disposable incomes (hospitality).

Top PE deals: Q2 2012

Investor	Investee	Sector	USD million
Morgan Stanley	Continuum Wind Energy	Power & Energy	210
APG – pension fund	Lemon Tree Hotels	Hospitality	130
Warburg Pincus	Future Capital Holdings	Banking & Financial Services	112
Advent International Corporation	CARE Hospital	Pharma, Healthcare & Biotech	105
TA Associates	Omega Healthcare Management Services BPO unit	IT & ITeS	93
Indivest Pte Ltd – Government of Singapore Investment Corporation Pte Ltd	Marico Ltd	FMCG, Food & Beverages	75
Sequoia Capital Global Equities	Just Dial Pvt Ltd	It & ITeS	61
ChrysCapital	Intas Pharmaceuticals Ltd	Pharma, Healthcare & Biotech	56
NYLIM Jacob Ballas	Super Religare Laboratories	Pharma, Healthcare & Biotech	50
KKR	TV Logistics Services	Logistics	48

 

Outlook for H2 2012
Notwithstanding the rather dismal M&A, and lackluster PE performance for Q2 2012 quarter, this could well be the proverbial darkest hour before the dawn.

The end of June 2012 saw some welcome and rapid reprieves – clarifications on GAAR not being applied on a retrospective basis, an arrest of the free-fall of the rupee and the resumption of responsibility for the finance ministry by the Prime Minister Manmohan Singh, who was instrumental in India’s economic liberalisation in 1990. From a valuation perspective, analysts now deem India to be trading at historically low levels, and hence see attractive multiples. Further, India’s domestic demand remains strong, thanks to rising consumption levels and increasing purchasing power – in 2011, India rose to third place globally in terms of purchasing power parity, only behind USA and China, with reports suggesting that India will continue to be the third largest economy in 2015. The combination of these factors could be a renewed interest in Indian entities by foreign players and higher inbound activity.

Key drivers of outbound M&A such as strong balance sheets, the need to look beyond home markets and attractive valuations continue to exist, even if the current economic uncertainty in the European and American markets may have put the cross border ambitions of Indian companies temporarily on hold. Factors such as the recent unveiling of a plan to address Europe’s distressed banking sector by European leaders could, if successful, see a rebound in outbound M&A.

Finally, if the momentum demonstrated so far by domestic deal activity also sustains in H2 2012, the dealscape may see a turnaround in the latter half of 2012. However, the industry will also keep a wary eye on headwinds such as a possible increase in fuel prices, deterioration of the European situation, lackluster demand for exports from other nations such as US, and – much closer home – poor monsoons.

Karthik Balisagar
Valuations Manager and Assistant Head of Valuations South Asia Group
Grant Thornton UK LLP
T +44 (0)20 7865 2475
E karthik.balisagar@uk.gt.com

With special thanks for their contribution to Ankita Arora and Swetha Sunder of the Grant Thornton India Dealtracker team.

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