India Inc treads cautiously, M&A activity slows down

Thursday, October 13, 2011 | Posted by: Grant Thornton
Categories: India, India Watch Issue 14 | Tags: India, M&A, deals, energy, market, Deal Tracker, Grant Thornton LLP, assets, tourism, telecom

Merger and acquisition (M&A) deal activity in the first nine months of 2011 totaled US$ 32.6 billion from 465 deals compared to US$ 42.4 billion from 511 deals during the corresponding period in 2010. While the first half of 2011 kept pace with the corresponding period of 2010 in terms of deal value, the M&A space witnessed a marginal setback in the third quarter of 2011 owing to European debt woes, S&P’s downgrade of US sovereign debt, rickety markets and tightening monetary policy in India.

                                 

Q3 Deal Summary	Volume		Value (US$b)
Year	2010	2011	2010	2011
Inbound	19	34	1.19	1.19
Outbound	39	29	0.63	3.69
Cross Border	58	63	1.82	4.88
Domestic	68	86	11.69	1.03
M&A	126	149	13.51	5.91
PE	58	94	1.71	1,91
QIP	16	3	2.18	0.27
Grand Total	200	246	17.40	8.10

 

In Q3’11, India witnessed 149 M&A transactions compared to 126 in the corresponding quarter of 2010. However, M&A transaction values in Q3’11 were estimated at US$5.91billion, compared to US$13.51billion during Q3’10. Q3’11 witnessed only one transaction greater than a billion US dollars and this accounted for 21% of the total M&A transactions in the quarter. H1’11 saw five billion dollar deals, which accounted for over 63% of total deal values. Q3’10 witnessed two billion dollar deals and these accounted for 89% of the total M&A deal value. The trend clearly indicates drying up of large deals in the quarter.

Domestic deal activity in Q3’11 saw a sharp decline as compared to Q3’10 mainly due to focus on internal group restructuring activities and limited focus on inorganic growth - a continuation of the trend seen in H1’11. While inbound deal values tripled in H1’11 (US$17.4 billion) as against H1’10 (US$5.4 billion), Q3’11 witnessed relatively muted inbound activity, with values remaining at the Q3’10 levels of US$1.19 billion.

The slowdown in inbound activity could be attributed to apprehension among foreign companies to commit capital to buy assets in India. The surge in outbound activity in Q3’11 has been driven by GVK Power & Infrastructure’s stake acquisition in the Alpha Coal mine and Alpha West Coal projects of Hancock Group for US$1.26 billion, which is the fifth largest M&A deal in 2011. Another outbound deal in the mining sector was seen in this quarter between GMR Energy and PT Golden Energy Mines for US$550 million. The last few years have seen Indian energy companies scouting the world for reasonably priced coal assets to feed several ongoing and planned power projects in the country. The ‘coal rush’ as it is being called, is a result of India’s rising appetite for energy, coupled with production shortfalls on account of environmental hurdles etc and is expected to result in continued deal activity in the quarters to come.

The quarter witnessed a noteworthy deal involving stake acquisition by Piramal Healthcare in Vodafone Essar. Though the minority stake in Vodafone India did not mark an entry into the telecom sector, nor did it indicate an exit from the pharmaceutical business it did highlight a possible short to medium term strategy for companies with significant cash reserves.

The acquisition of Holidaybreak Plc by Cox and Kings for over US$500 million has brought the Indian travel and tourism sector back into the spotlight. The sector had seen subdued activity in the past owing to the 2009 downturn. However, the travel and tourism sector has made a comeback of sorts in the face of increased government spending; the launch of universal crowd-pullers such as Formula 1 in India and rising disposable incomes in the country. As a result the sector is expected to present an attractive avenue for investment, and possible subsequent consolidation.

The capital intensive telecom infrastructure business is expected to face a challenge in raising capital from both volatile equity markets and the increasingly expensive debt market. We therefore expect consolidation in the near future as companies find it difficult to compete with larger players with the existing scale of operations.

In terms of volume, the most active sector was information technology (IT) and information technology enabled services (ITeS) which saw 29 transactions, followed by the Pharmaceutical and Media and Entertainment sectors, witnessing 17 and 14 transactions respectively in Q3 2011.

Top Sectors M&A: Q3’11 sector break-up by value

Top 10 M&A Deal: Q3’11

Acquirer	Target	US$m	%
GVK Power & Infrastructure	Hancock Group – coal mines and a port and rail project	1,260	79%
Piramal Healthcare Ltd	Vodafone Essar	640	5.50%
GMR Energy	PT Golden Energy Mines	550	30%
Adani Power Ltd	Growmore Trade and Investment	531	N.A.
Cox & Kings Ltd	Holidaybreak Plc	510	100%
Group Danone	Wockhardt Group Nutrition business	355	100%
Sanlam	Shriram Capital	266	26%
Softbank Corp	InMobi	200	N.A
Motherson Sumi Systems	Peguform Group	193	80%
United Phosphorus	DVA Agro Do Brazil	150	51%
Ram Kaashyap Investment	Gemmia Worldwide S.A	150	100%

 

Private Equity (PE) activity in Q3’11 saw a significant surge in terms of deal volumes and a moderate increase in terms of deal value as opposed to Q3’10. The first nine months in 2011 saw private equity deals surpassing the total deal quantum during the year 2010. While the initial half of the year observed brusque deal activity worth over US$5 billion from c. 200 transactions, the relatively sluggish beginning of second half of the year reflects the current market mood for steady and vigilant moves rather than the aggressive ones witnessed in the first half of the year.  PE funds generally invest in unlisted companies with the hope of generating returns by exiting through IPOs. Volatility in Indian markets during the quarter and a passive IPO market could possibly have been reasons for cautious and subdued PE investments in the quarter. Moreover, valuation increases in sectors such as e-commerce pose a challenge to investors, with too much money chasing too few opportunities forcing deals to hit a roadblock.  On the exit front, PE investors no longer continue to leverage on IPO as the sole value unlocking mechanism as exits in the year-to-date have largely been a combination of strategic and secondary sales.

The quarter also witnessed diminishing share prices of listed companies adversely affecting the portfolios of large private equity players. Despite volatility in markets, existing listed companies will find it more attractive to raise private equity funds than going for rights issues or external borrowing, as PE investors may tend to value a company on its fundamentals rather than on the basis of short-term price movements. Thus, even during unfavourable market conditions, experts believe transactions in the listed space are likely to go up as the typical fund raising sources dry up. However, deals may take longer to close, given the prevailing market conditions and the resultant iterative negotiation process.

Top 10 PE Deals: Q3’11

Investor	Investee	%	US$m
Blackstone Group	Embassy Property Developments	37%	200
Goldman Sachs	ReNew Wind Power	N.A.	200
Standard Chartered Private Equity, JMF, JMF Trustee Co, JMF Products & Build India Capital Advisor	GMR Airports Holding Ltd	N.A	131
Blackstone Group	Visa Power Ltd	N.A.	111
J.P Morgan Asset Management	Soma Group	N.A.	110
Capital International	L&T Finance Holdings	N.A.	74
Standard Chartered Private Equity	Varun Beverages	5%.	56
Xander Group	HCC Infrastructure	15%	52.17
Blackstone group	Jagran Media Network Investment	N.A.	50
Blackstone Group	Monnet Ispat & Energy	7%.	50
NEA, Omani industrial group & GTI	Nova Medical	N.A.	50

 

Real estate and infrastructure continues to be the top scoring sector aggregating investments over US$500 million during the quarter, followed by power and energy with deals worth over US$400 million.

Top Sectors PE: Q3’11 sector break-up by value

We expect the last quarter of the year to have both sunny and not-so-sunny sides, keeping in line with the global scenario. On the gloomier side, economic uncertainty, rising interest rates, and adverse currency movements are expected to make investors cautious and M&A financing difficult to come by. On the sunnier side, certain sectors with potential for expansion such as energy and resources, present ideal avenues for investment. Certain ‘wild cards’ in the mix also include revised takeover norms stipulated by SEBI on increasing the threshold for triggering an open offer, and the current economic situation in Europe. While the former could lead to larger transactions going forward, the latter could imply attractive European targets. Whatever the outcome of the interaction of these myriad factors, the last quarter is likely to play a key role in defining the overall sentiment of the year.

Karthik Balisagar
Valuations Manager and Assistant Head of Valuations South Asia Group
Grant Thornton UK LLP
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With special thanks for their contribution to Ankita Arora and Sowmya Ravikumar, Grant Thornton India Dealtracker team.

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