Indian cross border M&A closes the year on a high

Friday, January 21, 2011 | Posted by: Sajeev Gandhi
Categories: | Tags: India, investment, economy, Grant Thornton, global, China, growth, India Watch, UK, infrastructure, risk, South Asia Group, Grant Thornton India, international, deals, South Asia, economic, Indian Economy, sectors, Cross border

India’s economy continued to demonstrate strong growth during 2010. There was significant liquidity in the market with both corporate profits and the sensex posting strong gains for the year. The BSE sensex closed 2010 at 20,509 a respectable 17% uplift during the year. Our view is that this positive trend is likely to be maintained in the medium term given the robustness of the domestic Indian market albeit against a backdrop of western economies which clearly still face some economic challenges.

During 2010, India saw 651 M&A transactions (excluding Private Equity) compared with 330 deals in 2009. The combined value of deals during this period was close to $51 bn which is a very significant uplift from the same period in 2009 which saw deal values at close to $ 12 bn.  Interestingly, the average deal size also exhibited strong growth from $36 m in 2009 to $ 79 m in 2010 demonstrating the increasing risk appetite and fire-power from Indian corporates.

Positive sentiment amongst Indian corporates, strong balance sheets and access to debt and equity capital coupled with a strengthening rupee have also led to a significant upturn in the number and value of cross-border M&A deals during 2010. 2010 saw 286 cross border transactions (of which 196 were outbound from India) with a total value of $31.4 bn. In contrast, 2009 witnessed only 156 deals in total (82 outbound) with a value of $5.3 bn. This significant upturn in deal activity demonstrates the resilience and robustness of the Indian economy having recovered at an impressive pace following the global downturn in 2008/09. Indian corporates have also capitalized on the positive sentiment to undertake strategic corporate transactions.

With regards to sectors, the Financial Services/Banking sector witnessed the most M&A activity in 2010 with 70 deals transacted in total. This was followed by 56 transactions in the Pharmaceutical & Healthcare space and 27 deals in the Metals & Ores sector. Although Financial Services witnessed the highest number of transactions, it was the Telecom sector that was the top performer by value at close to $14.6 bn being catapulted to the top spot by Bharti Airtel’s acquisition of Zain Africa ($10.7 bn) in March 2010. The largest deal for the year in 2010 by value was in the Oil & Gas sector where Reliance Power merged with Reliance Natural Resources with a deal value of c $11 bn. Earlier during the year witnessed a significant inbound transaction in the Pharmaceutical sector when Abbott Labs acquired Piramal Healthcare for $3.7 bn in May. Two other notable deals during the last quarter of the year saw China’s Huaneng Group acquire a 50% stake for $1.2 bn in power utility company, InterGen from GMR Infrastructure in India and Reckitt Benckiser’s $726 m acquisition of Paras Pharmaceuticals in December.

In our view, we expect the IT/BPO, Telecoms, Pharmaceuticals and Energy (oil & gas/metals) sectors to maintain activity in the M&A arena in the short to medium term. In addition, we expect the pace of M&A activity in the mid-market particularly out of India to pick up considerably over the next 18 months.

It is clear from the statistics that India Inc. is back on the acquisition trail with renewed vigour. We expect deal momentum to continue given the desire and ability of Indian corporates to globalise. We also believe that the balance between outbound and inbound will become more even as western corporates seek growth markets and rules around the Foreign Direct Investment (FDI) framework in India are eased across sectors. Nevertheless western economies are still not completely out of the woods albeit market sentiment is clearly on the rise again and any indications of a double dip could put the brakes on India Inc’s risk appetite.

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Head of M&A, South Asia Group