Indian M&A deal value has remained relatively high on average

Wednesday, January 07, 2009 | Posted by: Grant Thornton
Categories: | Tags: India, investment, global, India Watch, infrastructure, South Asia Group, deals, Anuj Chande, value, Pankaj Karna

The decline of the global economic environment has had a predictably negative effect on Indian Merger & Acquisition (M&A) activity. M&A deal volumes and values fell in the first 2 months of the year in comparison to the corresponding periods over 2008 and 2007. The total number of M&A deals in this period stood at 35 - down from 99 in 2008. With the fall in the volume of deals, there has also been a fall in the value. In the first 2 months of the year, the total value of the 35 deals stood at $1.2 billion - down from $4.6 billion over the same period in 2008.

However, whilst the total value of deals has fallen by 73.6% and the total volume of deals has fallen by 64.6% over the period, the average value per M&A deal only declined by 25.4% (from $46.5 million in the first 2 months of 2008 to $34.7 million over the same period in 2009). So, although the number of deals has declined over the period, the average deal value has remained relatively high - a promising statistic considering the reduced values of companies across the world. The continuing high average value per M&A deal is due to the numerous relatively large deals which are continuing to take place over the period alongside the decline in the number of small to medium M&A deal values.

There were 10 outbound (Indian companies acquiring businesses outside India) M&A deals in the first 2 months of 2009 with a total value of $140.7 million. The largest outbound M&A deal so far in 2009 has been GMR Energy Ltd’s acquisition of Indonesia based PT Barasentose Lestarif for $80 million. Of the 10 outbound M&A deals, 6 of the targets were in North America and Asia, followed by 2 each in Europe and Africa.

There were 13 inbound (international companies or their subsidiaries acquiring Indian businesses) M&A deals in the first 2 months of the year with a total value of $523.9 million, as against 18 deals with a total value of $500 million in the corresponding period in 2008 - a $23.9 million increase. As illustrated by this data, even with restricted credit and increased cash retention, India is still seen by many foreign investors as both a key M&A destination and a maturing growth market. The largest inbound M&A deals over the period were Bahrain Telecommunications Co’s acquisition of a 49% stake in S Tel Ltd for $225 million and BIC Group’s acquisition of Cello Group for $175.6 million.

Over the same period, there were 12 domestic (both acquirer and target being Indian companies) M&A deals, with a total value of $550 million. The largest domestic M&A deal so far in 2009 has been Quippo Telecom Infrastructure Ltd’s acquisition of a 49% stake in Wireless Tata Telecom Infrastructure Ltd, for a value of $533 million.

The M&A sectors which garnered the most valuable investments in the first 2 months of the year were: Telecommunications, with a share of 63% through 4 deals with a combined value of $758 million; and Mining, which took 9% of all investments, through 2 deals which had a combined value of $108 million. In this period, as with 2008, the Pharmaceutical, Healthcare & Biotechnology and Media, Entertainment & Publishing sectors were the most active in terms of volume, seeing 5 deals each.

On the whole, Indian corporates have remained cash strong throughout this economic downturn, but, as illustrated by the data above, there is a noticeable change in Indian M&A activity. As with companies across the world, there has been a change in focus for some India corporates from short and fast external growth to sustainable and organic growth and, until we see a change in economic conditions, this trend is unlikely to abate.

However, while still modest so far in 2009, foreign investment in India remains strong, with India seeing more foreign investment at the start of 2009 than in the corresponding period in 2008. This is likely to continue as valuations decline and shareholders increasingly look to release capital. When a level of confidence returns to the global market, India - with its phenomenal growth potential - should expect to see a flurry of foreign investment, as cash rich investors seek to make the most of undervalued opportunities within India’s fast emerging markets. Equally, in relative terms cash rich Indian companies are still looking at overseas acquisitions albeit with a more circumspect approach.

Anuj Chande
Partner and Head of South Asia Group
For Grant Thornton UK LLP

Pankaj Karna
Partner and Head of Corporate Finance
For Grant Thornton India