The Hindu Business Line : Management buy-outs gaining ground in India

MANAGEMENT buy-outs (MBOs) may not exactly be the rage in India, unlike the West where MBOs have a much better success rate than strategic buy-out deals. The concept, though, is fast gaining favour here, with a flurry of big-ticket foreign private equity investors entering the Indian market in search of buy-outs.

In fact, a handful of MBOs — the purchase of controlling interest in a company by its existing management, usually in cooperation with outside financiers — could be in the offing during the next few months.

Close on the heels of the MBO deal involving ICI Paints nitrocellulose business, the UK-based private equity investor, Actis, is learnt to be in advanced stages of clinching three to four MBO deals over the next six months. Leading private equity players including Oakhill and Newbridge are also looking at a larger role in India and are believed to have earmarked significant amount for investments.

Interestingly, Actis is in the process of creating a $350-million fund for investments in India over the course of the next few years. "This would roughly mean investments of about $60-100 million every year for the next three to five years," Mr Steven Enderby, Partner, Actis, told Business Line.

"We recently carried out our very first MBO in India with the purchase of the nitrocellulose business of ICI Paints. Our experience shows that MBOs are low-risk and high-satisfaction investments. Out of the about 30 buy-outs which Actis has executed on a global basis, 27 of them are on track. In fact, in Europe over 90 per cent of the MBOs have been successful," Mr Enderby said. In India, Actis is eying sectors such as pharma, auto components, FMCG and textiles for MBOs.

The company, incidentally, was formed in 2004 following a self-funded management buy-out of the business from CDC Capital Partners.

However, the number of MBOs in India till date stands only in single digits, with the most recent MBOs being the purchase of the auto components business of Escorts by the top management, and the purchase of Gilbey's Green Label by the former head of Guinness UDV India.

"Companies prefer MBOs because it gets them the best value, without running the risk of divulging trade secrets to the competition. Also MBO deals get executed quickly and have a very high completion rate. For instance, our deal with ICI took only about 76 days," Mr Enderby said.

Meanwhile, Escorts Auto Components Ltd, following its management buy-out in June this year, is in the process of diversifying its product portfolio and finding new markets.

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Management buy-outs gaining ground in India