The Hindu Business Line : Corporate finance deals in 2006: The party shows no signs of slowing

Corporate finance activity in India saw 697 deals worth Rs 865 billion ($19 billion) in 2006, a rise of 18 per cent in deal value over last year. The average deal size for 2006 was around Rs 1,241 million ($28 million). While there was a slowdown in deal activity in the second half of 2006, the year ended with bidders lining up for the biggest deal yet in Indian M&A, the purchase of Hutchison's Indian telecom business, which promises to make 2007 a record year.

While strategic investments have ruled M&A activity in 2006 with a share of 60 per cent in the total deal value, private equity transactions generated marginally higher average deal values; Rs 1,249 million ($28 million) against Rs 1,235 million ($27 million) for strategic deals.

International acquirers made up a 71 per cent share of total deal value, a substantial increase from 56 per cent of 2005. International acquirers showed a willingness to pay substantial premia to gain control over targets with the average deal values at Rs 1,992 million ($44 million) against an average deal value of Rs 649 million ($14 million) by Indian acquirers.

Private equity investments

The year 2006 had 276 private equity transactions worth Rs 345 billion ($7.6 billion), a share of 40 per cent in total deal value. This is a massive growth of 271 per cent over the previous year's Rs 93 billion ($2 billion) worth of investments. About 35 per cent of all PE deals were in listed Indian companies. Various private equity investors put in Rs 44 billion ($970 million) in Idea Cellular in the second half of 2006.

Some private equity players also made profitable exits in the current market. Ashmore Investments and Deutsche Bank sold their stake in Spice Telecom to Telekom Malaysia for Rs 8 billion ($179 million). The Carlyle Group sold a 15 per cent stake in ShareKhan, an online broking company, for Rs 1.4 billion ($32 million), and Citicorp sold a 23 per cent stake in Progeon, an outsourcing company, to Infosys Technologies for Rs 5 billion ($115 million). With the real-estate sector being opened up for foreign investors and the potential of the Indian market, real-estate development companies will be the new hot spot for investors.

Sectors, key deals

Information technology, telecom and finance deals dominated all M&A activity, with a share of 48 per cent of total deal value.

Information Technology

(104 deals, totalling Rs 167 billion or $3.7 billion)

The information technology sector experienced a 115 per cent growth in deal value with some big ticket acquisitions announced in 2006. The outsourcing segment attracted deals worth 29 per cent of total deal value of this sector. Deals in the information technology arena took place at relatively high PE ratios with the values ranging from 18 to greater than 40. The takeover of Mphasis BFL by Electronics Data Systems for Rs 16.9-billion ($377 million) happened at 43 times its 2006 profits.

The largest deal in this sector was the Rs 53.7-billion ($1,194 million) acquisition of i-flex solutions Ltd by Oracle. Oracle had acquired a controlling stake in i-flex solutions from Citigroup in 2005. This year it attempted to consolidate its holding by acquiring an additional stake through a preferential issue as well as through a tender offer. The preferential issue was for a 5.23 per cent stake worth Rs 5.8 billion ($129 million) and the tender offer was for a 35 per cent stake of which it was able to secure around 28.3 per cent for Rs 48 billion ($1,064 million).

The other large deal in the IT space was the Rs 40.5-billion ($900 million) acquisition of Flextronics Software Solutions by Kohlberg Kravis Roberts & Co that was announced in the first half of 2006.

Telecom

(19 deals, totalling Rs 151 billion or $3.4 billion)

The fast growing Indian telecom market saw a fair amount of consolidation in the first half of 2006. The Aditya Birla Group bought out the Tata Group in Idea Cellular for Rs 44 billion ($979 million). Hutchison Whampoa increased its stake in the Indian subsidiary by 5 per cent by acquiring Rs 20 billion ($450 million) worth of shares from the Hindujas, and Telekom Malaysia was finally able to gain a foothold in India by acquiring a 49 per cent stake in Spice Telecom for Rs 8 billion ($ 179 million).

The attractiveness of the telecom business in India is highlighted by the relatively higher average PE ratio of over 50 in these deals.

Towards the close of the year, various private equity players invested Rs 44 billion ($970 million) in Idea Cellular for a 34.5 per cent stake. The investors included Providence Equity Partners, TA Associates, ChrysCapital, Citigroup, and others. Idea Cellular plans to list on the stock exchanges soon so that these investors have a chance to get a big upside. These deals have happened at a PE ratio greater than 60 times the company's 2006 profits. This offers an opportunity to private equity players to repeat the success Warburg Pincus had on its investment in Bharti Airtel, which is today India's leading cellular telecom company.

The other Indian telecom company that attracted private equity interest was Tata Teleservices of the Tata Group. Temasek Holdings and Sterling Infotech invested Rs 18 billion ($ 397 million) in the company. Tata Teleservices offers mobile and fixed telephony across India and has over 14 million subscribers.

The year 2006 closed on news of the imminent sale of 67 per cent stake in held by Hutchison Whampoa in Hutchison Essar. A number of players, both Indian as well as international, have expressed interest in the stake. Among the leading contenders are Vodafone, Reliance Communications, Essar (the current Indian partner in the business) and several private equity players. Hutchison Essar has 22.2 million subscribers in India and revenues of Rs 58 billion ($ 1.3 billion). At a minimum valuation of $14 billion for the stake 2007 promises to be the year of telecom.

Finance

(109 deals, totalling Rs 101 billion or $ 2.2 billion)

The financial services sector attracted a substantial amount of private equity interest. Private equity investors contributed 69 per cent of the deal value in the sector. Valuations have also been high with the average PE ratio around 55 and in some deals over 100.

The largest deal in this sector was the sale of a 12.9 per cent stake held by Standard Life in Housing Development Finance Corporation (HDFC) to Citigroup for Rs 30.4 billion ($675 million). Franklin Templeton took over its Indian subsidiary in the mutual fund business by buying out the 25 per cent stake held by the Rajan Raheja Group for Rs 4 billion ($89 million). Franklin Templeton India had assets under management of Rs 238 billion ($5 billion) as of December 2006. The other major private equity transaction was the investment of Newbridge Capital in the Shriram Group, the South-based financial services outfit. Newbridge invested Rs 2.2 billion ($48.4) in Shriram Holdings (Madras) Ltd, which will give it an effective stake of 49 per cent in the company after conversion of all instruments.

Oil and Gas

(15 deals, totalling Rs 80 billion or $ 1.8 billion)

The large deals in the oil and gas sector were pre-Initial Public Offer placements by two companies: Cairn India and Reliance Petroleum. The largest deal was the pre-IPO placement by Cairn India to Petronas International. Petronas invested Rs 28 billion ($628 million) for a 9.8 per cent stake. The company raised an additional Rs 5 billion ($118 million) from various other investors. The subsequent IPO by Cairn India received only a lukewarm response and the shares listed at a 7.5 per cent discount to the IPO price. Cairn India has oil exploration interests in Western and Southern India. In the first half of 2006, the Mukesh Ambani-controlled Reliance Petroleum sold a 10 per cent stake to financial investors for Rs 27 billion ($600 million) ahead of its IPO. Chevron took a 5 per cent stake in Reliance Petroleum for Rs 13.5 billion ($300 million).

Pharmaceuticals and healthcare

(46 deals, totalling Rs 53 billion or $1.2 billion)

The pharmaceutical sector had private equity investors of up to 19 per cent of total deal value. This relatively lower investor interest has resulted in lower PE ratios with the average at 18.

The largest deal in the pharmaceuticals sector was the takeover of Matrix Laboratories by Mylan of the US. Matrix Laboratories was started by Mr N. Prasad and colleagues when they took over a small pharmaceutical company for Rs 80 million ($1.7 million) in 2000. Mylan Laboratories paid Rs 24 billion ($539 million) for a 51.5 per cent stake and has made a successful tender offer for a further 20 per cent worth Rs 9 billion ($210 million). Matrix Laboratories today has sales of Rs 8 billion ($177 million). This deal took place at a PE of around 26 times its 2006 profits, the highest in this sector. The pharmaceutical sector also saw some notable private equity investments. These include the Blackstone Group's Rs 2.3-billion ($50 million) investment in Emcure Pharmaceuticals and Quantum M and Blue Ridge's investment of Rs 1.5 billion ($33million) in Fortis Healthcare, operator of a chain of hospitals in India.

Overseas deals

Indian companies are finally stepping out of their comfort zone and are being increasingly adventurous with overseas acquisitions. Against 100 deals worth $2.4 billion in 2005, 2006 saw 140 deals worth $8 billion. Not only has the number of deals increased substantially in the last three years, but there has been a significant increase in the average deal size as well — from $7.5 million in 2002 to $58 million in 2006. And this was without counting the $12-billion bid for Corus by Tata Steel. With the sustained growth of the domestic market it is becoming easier for Indian companies to raise funds for overseas acquisitions without over-stretching their balance-sheets. Europe is the favoured destination of Indian corporates with a share of 53 per cent in total deal value.

Sectors

The oil and gas sector has ruled deal activity this year with a share of 22 per cent in deal value. The pharmaceutical and healthcare sector was aggressive with 20 deals and a share of 16 per cent by value, and information technology was at 13 per cent.

Top Deals

Towards the close of the year, Aban Loyd Chiles Offshore announced the mandatory tender offer for Sinvest in which they had acquired a 33.76 per cent stake for $438 million earlier in 2006. The $800-million tender offer was the largest overseas deal by an Indian company.

The Tata Group, which has been aggressively following an overseas acquisitions strategy in recent years, has added nine acquisitions to its tally this year, not including the Tata-Corus transaction. The Group's largest deal in 2006 was the $677-million acquisition of a 30 per cent stake in the US-based Glaceau by Tata Tea. Last year, the Tata Group had 10 deals to its credit.

Another significant transaction saw Suzlon Energy, a wind power major in India, acquire Belgium-based Hansen Transmissions International NV for $565 million. Hansen is a wind turbine gearbox manufacturer and this acquisition will makes Suzlon an integrated wind turbine manufacturer

The third largest transaction was the $562-million acquisition of the German generic pharmaceutical company, Betapharm Arzneimittel GmbH by Dr Reddy's Laboratories. This acquisition makes Dr Reddy's the fourth largest generics company in Germany. A feature of all of these large transactions was that private equity investors were on the selling side. TSG Capital Partners sold its stake in Glaceau to Tata Tea, while Allianz Capital Partners and Apax Partners Worldwide sold Hansen Transmission to Suzlon. 3i was the private equity investor in Betapharm Arzneimittel.

There is no question that both the quantum and size of deals will continue to increase as more companies look to expand their business and markets. There will be further deals in sectors such as pharmaceuticals, information technology and auto components as Indian companies fulfil their global ambitions.

Looking ahead

With the continued strength of the Indian economy and stock markets, India is likely to participate fully in the anticipated global M&A bull market in 2007. Indian companies are likely to take ever larger steps globally, particularly into the US and Europe, while the scale of domestic Indian companies will continue to attract both strategic and private equity interest, the latter fuelled by the growing funds raised from Western investors seeking high returns. The party is still in full swing with no sign of relenting anytime soon.

(The authors head India Advisory Partners, which is an independent, cross-border M&A advisory Group. Contact: contact@indiaadvisorypartners.com)

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