Domestic deal activity bucks the trend - Overall deal momentum sustained

Monday, April 16, 2012 | Posted by: Grant Thornton
Categories: India, India Watch Issue 16 | Tags: sectors, IPO, Private Equity, M&A 2012, India Mergers and Acquisitions 2012, Domestic Deals 2012, Internal restructuring, Deals 2012, first quarter 2012, Mergers, deals 2012, QIP

The quarter witnessed M&A deal activity of US$18 billion, in line with activity levels seen during the corresponding period in 2010 and 2011. However, the focus in Q1 2012 was domestic deals, particularly internal restructuring and mergers comprising approximately US$13 billion of the total M&A deal value. The focus on mergers and internal restructuring activities, a trend which gained prominence in 2011, appears to have intensified in 2012 driven by Vedanta Group restructuring, estimated to be worth over US$12 billion.

Deal Summary: January – March 2012

                                 

Q1 Deal Summary	Volume			Value (US$ billion)
Year	2010	2011	2012	2010	2011	2012
Inbound	23	26	36	1.12	13.75	1.26
Outbound	46	34	26	13.26	1.73	0.69
Cross Border	69	60	62	14.39	15.47	1.96
Domestic & Internal Restructuring	119	82	115	3.05	2.40	16.32
M&A	188	142	177	17.44	17.87	18.27
PE	59	75	118	1.56	2.61	2.01
QIP	9	2	2	0.87	0.53	0.1
Grand Total	256	219	297	19.87	21.01	20.35

It may be too early to conclude a trend based on Q1 2012 cross border activity but deal values have significantly declined in the quarter when compared to earlier years. While Indian companies trade at a premium to their developed market counterparts on the basis of multiples and valuation ratios, the combination of India’s growth story and a weakened currency means that India still remains to be a favoured deal destination.

Indian companies may view European businesses as potential targets at relatively low valuations in order to gain access to advanced technology and markets; we have seen large cross border deals in the past, i.e. Bharti Airtel – Zain worth US$10.7 billion in Q1 2010, BP – Reliance Petroleum worth US$7.2 billion and Vodafone Group Plc – Vodafone Essar worth US$5 billion in Q1 2011, and we expect more big ticket deals in the coming quarters. However, outbound acquisitions will be approached cautiously, given the prevailing debt crisis in Europe and recent proposals outlined in the Indian 2012 Budget (see article Indian Budget 2012: Round up).

Top M&A Deals: Q1 2012

Acquirer	Target	Sector	US $ Million
Sesa Goa Ltd	Sterlite Industries	Mining	11,927.80
Tech Mahindra	Satyam Computer Services	IT & ITeS	1,400.00
Piramal Healthcare	Vodafone Essar	Telecom	618.00
Sesa Sterlite – To be formed	Vedanta Aluminium	Metals & Ores	473.00
TV18 Broadcast	Eenadu Television Network	Media, Entertainment & Publishing	395.00
Watson Pharmaceuticals	Ascent Pharmahealth	Pharma, Healthcare & Biotech	393.00
Sesa Sterlite – To be formed	The Madras Aluminium Company	Power & Energy	363.00
Binani Industries	3B – Fibreglass Co	Manufacturing	360.00
Nippon Life Insurance	Reliance Capital Asset Management	Banking & Financial Services	290.00
Sky City Foundation	STel Pyt Ltd	Telecom	174.50

 

M&A Sector Focus
A wide range of sectors have contributed to M&A activity in Q1 2012, led by Mining and IT &ITES followed by Telecom, Pharma, Metals and Media & Entertainment.
 

The Vedanta internal restructuring deal in the mining sector constituted 65% of M&A values for the quarter. Other top sectors in terms of deal value were IT ITES and Pharma which also witnessed steady volumes, in line with corresponding periods in past years.

Telecom witnessed a sharp decline in deal value in the quarter with less than a billion dollars’ worth of deals, when compared to US$ 5 billion in Q1 2011 and over US$13 billion in Q1 2010. However, this is a sector that is set to enter a consolidation phase post the easing of M&A norms in the telecom sector allowing merged entities to have a market share of up to 60%. The recent ruling issued by the Supreme Court for the cancellation of 122 2G licences has affected a few foreign players such as Telenor, Sistema and Etisalat.  M&A activity in retail and civil aviation sectors remain muted with the Budget not providing clarity on FDI in these sectors adding to the woes of investors.

Q1 2012 witnessed sustained momentum in overall M&A deal making, however, the remaining part of the year will largely depend on the aforementioned regulatory implications.

PE
Private Equity has continued to witness sustained momentum with US$2 billion worth of deals in Q1 2012 led by Healthcare, IT ITES, Banking and Real Estate sectors. The quarter saw Morgan Stanley Real Estate Investment (MSREI), investing US$90 million in a realty project after more than four years out of the Indian market.

Top PE Deals Q1 2012

Investor	Investee	Sector	US $ million
Accel Partners & Tiger Global	Flipkart Online Services	IT & ITeS	150.00
Temasek	Godrej Consumer	FMCG, Food & Beverages	137.00
General Atlantic LLC	Fourcee Infrastructure Equipments	Logistics	125.00
Olympus Capital	DM Healthcare	Pharma, Healthcare & Biotech	100.00
Government of Singapore Investment	Vasan Healthcare	Pharma, Healthcare & Biotech	100.00
Morgan Stanley Real Estate	Sheth Developer’s Mumbai project	Real Estate	90.00
Providence Equity, Macquaire Bank	Hathway Cable & Datacom	Media, Entertainment & Publishing	72.00
Airro Mauritius	Nandi Infrastructure Corridor	Infrastructure Management	65.00
3i India	Supreme Infrastructure	Infrastructure Management	61.00
Warburg Pincus	AU Financiers	Banking & Financial Services	50.00
NYLIM Jacob Ballas	Religare Finvest	Banking & Financial Services	40.00
Fidelity Growth Partners	Aptuit Laurus	Pharma, Healthcare & Biotech	40.00

 

PE Exits
We can expect a surge of exits likely in the coming years as funds raised post 2005 reach the end of their investment cycles, thus creating enormous pressure for exits for this invested capital, if investors are to maintain or increase their allocations to India. Considering the fact that the volatile stock markets are not expected to aid exits through IPOs, secondary PE deals could become one of the favoured transaction routes.

The quarter saw PE major Warburg Pincus exiting from Kotak Mahindra Bank Ltd, garnering over US$0.6 billion marking the largest exit by Warburg Pincus after they exited Bharti Airtel, by encashing US$1.8 billion on their original US$290 million investment in 1999.

In what we consider a major boost for the India PE/VC space, the Union Budget 2012-13 has proposed positive initiatives such as 100 per cent tax exemption on income from exits in the hands of SEBI registered PE/VC companies or funds, thereby aligning with the true intent of pass though status for the PE/VC funds/companies. At present, only investments in nine specified sectors are eligible for tax exemptions. The removal of the sector restrictions will foster the creation of a more robust domestic venture capital and private equity industry as most funds that invest in India operate as foreign investors from tax-friendly, offshore locations such as Mauritius or the Cayman Islands. 

The quarter witnessed negligible activity on the IPO and QIP front, a continuation of the trend seen in 2011. It remains to be seen how deal activity in the rest of the year will trend, given continued uncertainty in the European economy, impact of tax regulations introduced in the Budget and lack of clarity on the FDI and regulatory front. Nevertheless, we believe increased domestic activity and sustained PE momentum augurs well for overall deal activity for the rest of the year.

Karthik Balisagar
Valuations Manager and Assistant Head of Valuations South Asia Group
Grant Thornton UK LLP
T +44 (0)20 7865 2475
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With special thanks for their contribution to Ankita Arora and Sowmya Ravikumar of the Grant Thornton India Dealtracker team.

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