Business Daily from THE HINDU group of publications
Tuesday, Aug 07, 2007
ePaper
Business Daily from THE HINDU group of publications Tuesday, Aug 07, 2007 ePaper |
|
|
|
|
|
|
|
Opinion
-
Mergers & Acquisitions Corporate - Insight India Inc: Coming of age
James Winterbotham The Indian M&A (mergers and acquisitions) boom witnessed in 2006 left many wondering whether there would be a slowdown in 2007 but the results of the first half proved them wrong. India’s growth story continues to attract overseas investors and has also paved the way for Indian corporates to execute global strategies by acquiring companies both within and outside India not only to remain competitive but also to achieve scale. Corporate finance activity in India saw 382 deals worth Rs 1,047 billion ($26 billion) in the first half of 2007, a substantial rise of 126 per cent in deal value over the same period last year, and also registered the highest number of deals in any six months since the first half of 2002. The average deal size for H1 2007 was about Rs 2,740 million ($67 million), twice that of last year indicating that Indian companies are now attracting bigger investments. The other aspect attached to the increase in deal value is the relatively higher valuation of Indian equities. Throughout the first half, some big ticket deals kept the market abuzz. These included both overseas transactions such as Corus-Tata, Novelis-Hindalco and domestic ones like Hutchison-Vodafone and Sesa Goa-Vedanta. 
Strategic investments continued to dominate M&A activity in H1 2007 with a share of 82 per cent in the total deal value, highlighting a growth of over two times over the same period in the previous year. The average deal value for M&A investments was also the highest ever at Rs 2,975 million ($73 million) against Rs 2,021 million ($49 million) for PE (private equity) deals. Bidders also paid premia to acquire management control in the targets, for instance, Vodafone paid Rs 17 billion ($415 million) to the Essar Group, its partner in India, for management control of Hutchison Essar, one of the largest telecom players in India that it acquired from Hutchison Telecom International. Overseas acquirers made up a 79 per cent share of total deal value, a significant growth of over 177 per cent as compared to the same period in the previous year. The average deal value in this class was at Rs 5,342 million ($130million) against Rs 983 million ($24million) in the case of Indian acquirers. The international acquirers were mostly active in finance, IT, media and telecom sectors. The US was the leading investor country with $4 billion of investments. Private equity investments
There were 94 PE deals worth Rs 190 billion ($5 billion), indicating a marginal rise of about 3 per cent compared to the same period in 2006. The share of PE deals has fallen in the overall deal value for this period from 40 per cent in the first half of 2006 to 18 per cent in H1 2007. PE investors are now finding small and medium, unlisted companies more attractive to invest in. Investments in unlisted companies accounted for over two-thirds of all PE deals. Among headline deals, Carlyle picked up a 6 per cent stake in HDFC, India’s largest housing finance company, through a preferential allotment of Rs 26 billion ($644 million) while Citigroup retained its existing stake through a similar preferential allotment. Actis finally made its exit from Punjab Tractors by selling its stake to Mahindra and Mahindra (M&M), thereby bringing to an end the long-standing feud with the management. With this deal, M&M now has a 40 per cent share of the growing Indian farm equipment sector. The banking and financial services sector also attracted large PE investments during the period. Sectors, Key deals
The dominance of the IT sector was challenged in the Indian M&A space by telecom, which accounted for 43 per cent of the total deal value, due to a small number of large deals. Finance and oil & gas, accounting for 15 per cent and 6 per cent of deal value respectively, emerged as favourite choices for investment outpacing the traditional sectors such as engineering, cement, power, etc. Telecom: 4 deals, totalling Rs 449 billion ($11 billion): The growing signs of consolidation towards the end of 2006 were more evident this year with Vodafone acquiring a 67 per cent stake in Hutchison Essar, India’s fourth largest teleco m player. This deal took about three months to reach its conclusion with 5- 6 contenders in the fray, ranging from the Anil Ambani controlled Reliance Infocomm to Orascom from Egypt and Maxis from Malaysia. Analysts were kept guessing at the valuations each day until Vodafone’s final winning bid of Rs 447 billion ($10.9 billion). Vodafone had earlier cleared the way for this deal in 2003 by selling its stake in the RPG Group controlled cellular telecom business. Finance: 65 deals, totalling Rs 157 billion ($4 billion): The Indian financial services (banking, insurance, and financial services) continue to attract overseas and domestic investors. The value of strategic deals h as been slightly higher than PE investments in this segment. The majority of the deals were in the areas of broking, advisory, assets management and banking. During the period, various banks and financial institutions bought stakes in two leading bourses of the country — BSE and NSE — after these exchanges were de-mutualised by the market regulator, SEBI (Securities and Exchange Board of India). The largest deal in this sector was the sale to investors such as Goldman Sachs, General Atlantic and Softbank Asia Infrastructure Fund of a 5.9 per cent stake in ICICI Financial Services (IFS) for Rs 26.5 billion ($646 million). IFS will house the insurance, asset management and broking businesses of the ICICI Bank group. However, the Government has not yet granted the approvals for this investment to the investors even after repeated consideration. This period also witnessed the exit of foreign players such as Morgan Stanley and Raymond James from their existing JVs with Indian players and their decision to go solo to explore the potential in the growing securities and investment banking businesses. Morgan Stanley acquired J M Morgan Stanley Securities for about $480 million and its partners JM Financial Consultants retained the investment banking business for $22 million. The other major private equity transactions were investments in two of India’s leading stock exchanges, the NSE and BSE. This aggregated to over $750 million by a group of investors such as Goldman Sachs, General Atlantic, Softbank Asian Infrastructure Fund, Morgan Stanley, Citigroup and Actis. 
Oil & Gas: 5 deals, totalling Rs 59 billion ($1.4 billion): The Mukesh Ambani controlled Reliance Industries dominated the M&A activity in the sector with two large deals accounting for almost the entire deal value in this sector. Mr Mukesh Ambani, along with associates, increased his stake in the Group’s flagship company, Reliance Industries Ltd through an issue of convertible warrants. Upon conversion of instruments the promoters will control an additional 5 per cent stake. Another significant deal in this sector was the merger of Indian Petrochemicals Corporation Ltd (IPCL) into Reliance Industries, valued at Rs 42 billion ($1 billion). IPCL came into the Reliance stable in 2002 when the Government divested its 26 per cent stake and thereafter, Reliance increased it to 46 per cent through a tender offer. With this merger, the Reliance group has strengthened its market standing in the petrochemicals business, in which it is already the largest player. Information Technology: 56 deals, totalling Rs 25 billion ($604 million): The IT sector saw a slowdown in the M&A activity with total deal value accounting for less than 5 per cent for the first time since the la st three years. This may also indicate a growing concern that IT is no longer an attractive sector for foreign investors as business models mature. The average deal size for this sector is Rs 442 million ($11 million). The two significant deals were the sale of stakes by HDFC and Barclays in Intelenet, to the Blackstone Group along with the management for $86 million, and the purchase by WNS of a 100 per cent stake in Marketics Technologies, another BPO company. The IT sector continues to attract PE investments, although on a lower scale. This period saw PE investments contributing 26 per cent of total deal value for the sector. Other Sectors
169 deals, totalling Rs 252 billion ($6 billion) Other sectors, including chemicals, construction, electronics, engineering, real estate, foods, hospitality, retailing and power, accounted for 24 per cent of the total deal value. Apart from these sectors, the auto sector (automotive and auto components) accounted for 5 per cent of the total deal value. The big deals in this sector were Robert Bosch gaining control over its Indian subsidiary through a delisting offer and M&M buying over Punjab Tractors for Rs 14 billion ($350 million). Other traditional sectors such as pharmaceuticals, textiles and cements contributed about 1 per cent each to the total deal value. The Indian aviation sector also saw many deals, contributing to about 3 per cent to the total deal value. This sector has been in the news since the entry of many low-cost carriers (LCCs) and has witnessed consolidation during the first half of 2007. Jet Airways, India’s largest private sector airline, took over Sahara, another large private sector player and the Vijay Mallya controlled Kingfisher Airlines acquiring a significant stake in India’s first LCC, Deccan Aviation. The two state-owned carriers Indian and Air India have announced the merger of their operations. Overseas deals
Indian companies confirmed their presence on the global stage by announcing some of the largest deals in the history of Indian M&A. Indian companies now have the capability to acquire global companies that are much larger than themselves. This period saw the much talked about Tata-Corus deal ($12.1 billion) finally consummated, followed by the Hindalco-Novelis deal ($3.5 billion). These two large deals accounted for 61 per cent of the of the total overseas deal value. The Tata-Corus deal catapulted Tata Steel to the 5th position in global ranking in steel from the mid-50s position it had before the acquisition. The Novelis deal will make Hindalco the world’s largest aluminium rolling company. The significant aspect of these two deals is that both acquirers have realised that global consolidation is the only way to realise their growth strategy. They not only needed to acquire the global capacity but also to have access to overseas markets to achieve large scale operations and global competitiveness. In the first half of 2007 for the first time the total value of overseas deals ($25.6 billion) exceeded the domestic M&A deal value ($25.5 billion). Indian companies now have access to a wide range of funding alternatives on the back of strong balance sheets to realise their ambitions of overseas expansion. The US and the UK remained favourite destinations for Indian corporates with a share of 71 per cent of total outbound deal value. Sectors
The metals sector clearly ruled deal activity this year with a share of 68 per cent in deal value, skewed by two large deals announced. The engineering sector came as a surprise accounting for 8 per cent of total deal value. Indian companies have tried to acquire overseas capabilities in designing and manufacturing technologies in this space. The IT sector experienced a slowdown with international acquisitions at only 3 per cent of total deal value. Indian pharmaceutical companies continued to remain aggressive in acquiring overseas companies and contributed to about 3 per cent of the total deal value. Top Deals
Apart from the Tata-Corus and Hindalco-Novelis deals, Suzlon Energy, the fourth largest wind energy equipment supplier in the world, acquired a controlling stake in REpower, a Germany-based company, outsmarting the competitive bid from Areva in a long-drawn battle of over four months. With this acquisition, Suzlon achieved consolidation in the global market following the acquisition of component supplier Hansen last year. This will give Suzlon a global footprint in the fast growing wind energy market. Other large overseas deals were the acquisition of Algoma Steel, Canada by the Essar Group for $1.6 billion and the $1.2 billion acquisition of premium Scotch distillers Whyte & Mackay by Vijay Mallya controlled United Spirits. These deals also echoed Tata’s strategy of global consolidation. Looking ahead
If one were to go by the signs of the first half of 2007, it appears that more Indian companies are charting their goals globally, both strategically and opportunistically. This is likely to lead to further overseas deals from India, providing building blocks to Indian corporates to emerge as large, competitive, global players. While some are yet to take notice of India Inc., it has already taken major steps in emerging as an economic superpower.
More Stories on : Mergers & Acquisitions | Insight
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | The Hindu ePaper | Business Line | Business Line ePaper | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2007, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|