India M&A and PE 2011 - Resilience amidst odds

Monday, January 16, 2012 | Posted by: Grant Thornton
Categories: India, India Watch Issue 15 | Tags: deals, inflation, acquisitions, sectors, mergers and acquisitions, india, private equity, trends, e-commerce, inbound, foreign direct investment, outbound, private equity 2011, mergers and acquisitions 2011, inflation rates, public markets, deal 2011

Amidst the ongoing global economic woes, rising domestic inflation and interest rates, the weakening rupee and a volatile Sensex, 2011 has contributed to robust Indian deal numbers. Mergers & Acquisitions (M&A) and Private Equity (PE) in India clocked up 961 deals with a total value of to US$51 billion in 2011 compared to 971 deals amounting to US$62 billion in 2010.

                                 

Deal Summary	Volume			Value (US$billion)
Year to date	2009	2010	2011*	2009	2010	2011*
Inbound	74	91	132	3.9	9.0	26.9
Outbound	82	198	132	1.4	22.5	10.4
Cross Border	156	289	264	5	31	37
Domestic	174	373	342	6.7	18.3	5.0
Total M&A	330	662	606	12	50	42
PE	206	253	347	3.4	6.2	7.7
QIP	54	56	8	8.6	6.2	0.9
Grand Total	590	971	961	24.0	62.2	50.9

*Jan – Dec 9, 2011

Half yearly trend: While deal activity during H1’2011 echoed that of H1’2010, H2’2011 has seen relatively lower activity, reflecting fears over the economic dynamics of the European region. Nevertheless, deal volumes remained robust throughout the year. Importantly, the average size of deals where value was disclosed remained the same at approximately US$190 million.

M&A - Inbound bucks the trend: A notable trend reversal was observed in cross border M&A with focus shifting from outbound to inbound. Six out of the nine billion-dollar deals in 2011* were inbound, primarily owing to premium valuations received by Indian targets. The backdrop of stagnating economic activity in the west and the weakening rupee is making outbound acquisitions more expensive. This could also be a contributing factor for the downward trend in outbound deals. Having said that, the fundamentals of outbound M&A have remained intact as Indian acquirers continue to view outside markets strategic to their global growth plans, as witnessed in deals such as Mundra Port acquiring Abbot Point Port, GVK Power’s acquisition of Hancock coal mines, Aditya Birla Groups’ acquisition of Columbian Chemicals and Genpact’s acquisition of Headstrong, to name a few.  Domestic deal activity was relatively lower as compared to 2010 mainly due to a continuing focus on mergers and restructuring, despite volumes remaining buoyant.

Top M&A deals 2011

Acquirer	Target	Sector	% Stake	US$million
Vedanta Plc	Cairn India	Oil & Gas	59%	8670**
British Petroleum	Reliance Industries	Oil & Gas	30%	7,200
Vodafone Group Plc	Vodafone Essar	Telecom	N.A.	5,000
Mundra Port SEZ Ltd (Adani Group)	Abbot Point Port	Shipping & Ports	100%	1,957
GVK Power & Infrastructure	Hancock Group-coal mines, port/rail project	Mining	79%	1,260
iGate Corporate Apax Partners	Patni Computer Systems	IT & ITeS	83%	1,209

**Multiple transactions

M&A sector focus: The energy and telecom sectors have seen good amount of traction, accounting for over 50% of the total M&A deal value in 2011*. Other leading sectors in 2011* and their contribution to total deal values were IT and ITES (8%), pharma, shipping and ports, mining and automotive (approximately 5% each).  However, few sectors saw a sharp decline in deal values, such as telecom (down 61%) and pharma (down 67%), mainly owing to a drying up of large value deals, but the volumes continued to remain steady in these sectors.

M&A outlook: We can expect consolidation in the telecom space in 2012, with sector regulator TRAI proposing an increase in the combined market share caps and spectrum caps of merged entities. Also, the pharma sector is expected to see heightened M&A activity due to the impending patent cliff in the US (the patent protection for many big-selling drugs is expected to expire in the next few years which will lead to opportunities for other generic drug companies), and the increasing attractiveness of India as a low cost R&D destination. Other sectors to look out for in 2012 would be aviation and retail where the government is looking at opening up the Foreign Direct Investment (FDI) limits. The beginning of 2011 was witness to the notification of merger control provisions by the Competition Commission of India (CCI) and other government regulations on sector specific M&As such as inbound acquisition of drugs and pharma companies requiring approvals. Though we are yet to perceive any tangible effect on the deal activity as a result of these policies, it could result in increasing timelines for completing an acquisition. Also, the current flux in public markets, low trading multiples and increased costs of finance could be major causes of buyer-seller mismatch in price expectations, thereby resulting in prolonged deal closures.

PE Deals - Volume uptrend, drying up of large value deals: Private Equity investments in India showed significant activity in 2011* with a 23% increase in deal values over 2010. The resurgence could possibly be attributed to sluggish IPO & QIP activity coupled with a cautious return in confidence levels which were seen lacking in 2009 and the first half of 2010. There have been 347 PE deals in 2011* totaling a value of US$ 7.7 billion with no large deals announced.

Top PE deals 2011

Investor	Investee	Sector	Stake	US$million
Bain Capital, Government of Singapore	Hero Investment	Automotive	30%	848
Apollo Global Management	Welspun Corp	Manufacturing	N.A.	284
Texas Pacific Group	Shriram Capital	Financial Services	15%	257
Macquarie SBI Infrastructure Investments	GMR Airports	Infrastructure	N.A.	200
Standard Chartered PE(Mauritius), JM Financial-Old Lane Corporate Opportunities Fund, NYLIM Jacob Ballas India Fund	GMR Airports	Infrastructure	N.A.	200
Goldman Sachs	ReNew Wind Power	Power & Energy	N.A.	200
Blackstone	Embassy Property Developments	Real Estate	37%	200

 

PE sector insight: PE investments are back in the real estate and infrastructure space with the sector garnering close to US$1.7 billion of PE funding in 2011*. It is interesting to note that the real estate and infrastructure investments that took place in 2010 were primarily in the commercial and residential space, whereas 2011* attracted investments in large infrastructure projects such as airports, roads and highways.

Other major sectors driving PE activity were automotive (US$1 billion), power and energy (US$ 892 million), banking and financial services (US$ 816 million) and, IT and ITES (US$ 783 million).

Second coming of e-commerce: The year also witnessed e-commerce firms raising over US$300 million of investment from both PE funds and venture capital firms. Few of these companies received premium valuations with overall firm valuation upwards of US$ 250 million implying EV/Sales multiples ranging between 10x and 15x. One possible reason for stretched valuations could be that the investors expect e-commerce in India to replicate the e-commerce success story in developed countries. The second coming of e-commerce in India is backed by strong fundamentals such as critical mass of internet users, broadband penetration and 3G growth, rising middle class, improved payment gateways and logistics, etc, though there is significant scope to improve these parameters.

PE Outlook: PE investment in India faces high entry valuations driven by a high proportion of family owned business in India tending to wait for higher bidders and exercising extreme caution before dilution. This generally translates into longer negotiations and consequently longer time for deal closures. Since PE is still not seen widely as a preferred funding source, it may take some years for the Indian market to see much bigger deal sizes as the norm. Exit opportunities can be expected in the pharma, healthcare and biotech and real estate sectors in 2012; one of the possible reasons for these results could be the heightened PE investments that these sectors saw in 2007-2008, and the investment cycles coming to an end in 2012.

Overall, 2011 emerged fairly resilient in terms of deal appetite, despite challenging circumstances. However, stabilisation of economic factors is critical for deals to continue the momentum going forward, and it will be interesting to see how 2012 unfolds.

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 Sowmya Ravikumar of the Grant Thornton India Dealtracker team.

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