Sustained momentum in India M&A deal activity

Saturday, July 16, 2011 | Posted by: Grant Thornton
Categories: India, India Watch Issue 13 | Tags: India, China, India Watch, M&A, UK, mergers, acquisitions, sector, Competition Commission of India, value, deals

Against a backdrop of economic uncertainty in certain European regions, as well as moderating growth and demand, increasing interest rates, inflation issues and the merger control provisions being notified by the Competition Commission of India, M&A activity in India in the first half of 2011 has resiliently kept pace with 2010 levels, in line with our expectations.

 

		Volume			Value (US$m)
Half yearly	H1 09	H1 10	H1 11	H1 09	H1 10	H1 11
Inbound	33	44	57	971	5,409	17,442
Outbound	31	108	86	453	17,896	5,893
Total cross-border	64	152	143	1,423	23,305	23,335
Domestic	64	223	174	4,276	5,587	3,407
Total M&A	128	385	317	5,700	28,892	26,743
PE	89	125	203	1,784	2,950	5,089
QIP	5	26	4	2,018	2,560	652
Grand total	222	536	524	9,501	34,402	32,484

 

H1 2011 witnessed 317 M&A deals with a combined value of US$27bn as against 385 M&A deals amounting to US$29bn during the corresponding period in 2010. While cross border activity in H1 2011 has mirrored that of H1 2010 with deal values amounting to US$23bn, domestic deal value and volume have slowed down, with H1 2011 recording deals worth US$3bn (down 39% from H1 2010), from 174 deals (down 25% from H1 2010). H1 2011 saw many mergers and restructuring take precedence over domestic acquisitions as entities sought to drive down costs and provide impetus to internal organisation synergies. Average M&A deal sizes increased from US$75m in 2010 to US$84m in 2011, almost double the average deal size in 2009 (US$44m).

 

A remarkable trend reversal was observed in cross border deals with focus on deal activity shifting from outbound to inbound. One of the major reasons for the reversal could be the premium valuations that made Indian businesses look attractive. Out of the five deals valued at over a billion dollars, four were inbound. The other reason for the shift could be the stability in the Asian/Indian economy which looked like a safer bet when compared to uncertain European economies. This uncertainty coupled withits cascading effects on certain developed economies could be thereason for slowdown of outbound deals as most corporates are watchful about digging into their cash reserves during troubled times.

 

China and India have been leading contributors to M&A activity in the emerging markets. Considering the fact that Chinese banks do not traditionally lend to fund M&A’s and as China is beginning to tighten liquidity this year, India is expected to gear up to entice investors on the back of strong fundamentals such as its growing educated middle class population and low cost labour base.

 

The interest of foreign companies in Indian entities is likely to see a further uptrend as Korea and Russia are expected to start entering India along with regulars such as US, Europe and Japan. The opportunity is substantial in infrastructure and related sectors, with the government bringing in more private players and earmarking about US$1trillion to spend on the sector in coming years. Moreover, valuation multiples in this space look more attractive with sector valuations below those of the wider Indian market.

 

Despite lower outbound deal values seen in H1 2011 in comparison to H1 2010, the fundamentals of inbound and outbound M&A have remained intact as India continues to be a sought after destination and an aggressive buyer, as witnessed by Mundra Port acquiring Abbot Point Port. Indian companies have also certainly managed to develop management expertise in running large and complex businesses and are now looking aggressively to expand abroad and gain global foot-print.

 

With respect to big ticket deals, the first half of 2011 tried to keep up with the 2010 milestone, with five billion-dollar deals compared to six in the corresponding period last year. The largest deals in the first half of 2011 were seen in the Q1 of 2011 and they were BP plc (formerly British Petroleum) acquisition of 30% stake in Reliance Industries Limited for US$7.2bn and Vodafone Group plc increasing its stake in Vodafone Essar for US$5bn.

 

Top 10 M&A deals

Acquirer	Target	%	US$m
BP plc	Reliance Industries	30	7,200.00
Vodafone Group	Vodafone Essar	N.A.	5,000.00
Mundra Port SEZ Ltd (Adani Group)	Abbott Point Port	100	1,956.52
Vedanta plc	Cairn India from Petronas	11	1,500
iGate Corporation-Apax Partners	Patni Computer Systems	83	1,208.70
Aditya Birla Group	Columbian Chemicals Company	100	875.00
Hero Investment Pvt Ltd	Hero Honda Insurance	26	851.00
Nippon Life Insurance	Reliance Life Insurance	26	665.65
Serco	Intelenet Global Services	26	634
Genpact Ltd	Headstrong Corporation	100	550.00

 

IT &ITes sector has been the most active sector in the first six months of 2011 with 60 M&A deals amounting to nearly US$3bn. Value wise, Oil & Gas and Telecom would gain the upper hand with five M&A deals for US$9bn and four deals for US$5bn respectively. The other sectors which also saw a lot of activity were Pharma, Healthcare and Biotech, Manufacturing andBanking and Financial Services.

 

Telecom has continued to remain one of the top sectors clocking deal values of over US$ 5 bn in H1 2011 (US$ 14.5 bn in H1 2010). Further acquisition and consolidation can be expected in the sector as leading telecom companies are now under margin pressure in a saturated urban market, and growth is expected mainly from rural markets. There has also been a good amount of traction in the Oil andGas and energy sectors with big ticket deals such as BP – Reliance and Vedanta – Cairn.

 

M&A activity by sector

 

Private equity (PE) deals showed significant activity in the first half of 2011 with one and a half times the deal value and volume compared to the first half of 2010 and nearly three times the deal value and volume of the corresponding period in 2009. The resurgence in PE activity could possibly be attributed to sluggish IPO & QIP activity coupled with return in confidence levels which were seen lacking in the first half of 2010. There have been 203 PE deals in the first half of 2011 totaling a value of US$5bn.Increase in deal values has been driven purely by the volumes as the average deal size remained more or less the same across 2010 and H1 2011.

 

Top private equity deals

Investor	Investee	%	US$m
Bain Capital Government of Singapore	Hero Investment	30	847.83
Apollo Global Management	Welspun Corporation Ltd	N.A.	283.70
Texas Pacific Group	Shriram Capital	15	256.52
Macquarie SBI Infrastructure Investments Ltd	GMR Airports Holdings Ltd	N.A.	200.00
Standard Chartered Private Equity, JM Financial, NYLIM Jacob Ballas India Fund	GMR Airports Holdings Ltd	N.A.	200.00
HDFC Ltd., Norwest Venture, Beacon India, Cartica Capital, Faering Capital, Gaja Capital & Samara Capital	Ratnakar Bank	N.A.	156.52
Warburg Pincus India	Diligent Power	N.A.	150.00
Cerberus Capital Management L.P	Regulus Group and J&B Software, Billing & Payments Unit of 3i Infotec-Global	100	137
3i India Infrastructure Fund	KMC Infratech Ltd	N.A.	108.70
Baring Private Equity Partners India	Oriental Tollways	N.A.	103.26
Integrated Healthcare Holdings	Apollo Hospitals	8.82	102.17

 

Private equity investment by sector

 

Investments are back in the real estate and infrastructure space with the sectors garnering close to a billion dollar of PE funding in the first half of 2011. Also, Apollo Global Management is in talks with WelspunInfratech to invest approximately US$147m, which would result in further activity in the infrastructure space. 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 has attracted investments in the large infrastructure projects such as airports, roads and highways.

 

PE appears to be the space to watch out for in the second half of 2011 as the market expects to see US$10 bn worth of investments.

 

It only remains to be seen how the cautious credit climate and new take-over rules in India will impact the momentum in short term. However, with resurgence of confidence in the market we believe 2011 may witness another record year of deal activity. There could be large outbound deals in sectors such as metals and mining, oil and gas, infrastructure, retail and technology.

 

Inbound activity will primarily be in healthcare and pharmaceuticals and telecom infrastructure and services. Private equity institutions who started investing in 2006-2007 at record levels may look at good opportunities for a churn, especially at current valuations in certain sectors. This may result in interesting exits this year as 2009 and 2010 were not conducive with valuations still improving from the downturn. Global companies are beginning to show significant interest in Indian companies and this process may trigger profitable PE exits. At the same time large private equity players are keen to invest in the ‘India growth story’ especially in core sectors such as infrastructure, power and energy that has seen significant traction this year. We believe this trend will continue for the rest of the year.

 

Karthik Balisagar

Valuations Manager

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

 

Other articles in this issue of India Watch include:

Grant Thornton India Watch Index outperforms all major London indices for the first half of 2011

India’s United Progressive Alliance must act decisively for effective change

Indian listings in London: AIMing for the long term

Navigating India’s new Direct Tax Code