The Hindu Business Line : M&A scene in India

INDATA — a database on the Indian mergers and acquisitions market developed by India Advisory Partners, London — recorded 195 deals valued at Rs 124 billion ($2.8 billion) between January and June 2004 (Rs 1 billion = Rs 100 crore).

While the total deal value was not much higher than that in the second half of 2003 (Rs 118 billion, $2.6 billion), the average deal value was higher by 64 per cent at Rs 635 million ($14.1 million) compared to Rs 387 million ($ 8.6 million).

There were six deals of over Rs 5 billion compared to three in H1 2003 and only four in the whole of FY 2003.

Interestingly, one of the five largest deals in H1 2004 was a private equity transaction. Private equity deals accounted for 21 per cent of all deals by value.

It has been a bad year for investment banks, with transaction values dwindling.

While the stock market reacted sharply to the new government at the Centre, overseas companies (including private equity investors) in fact made larger acquisitions by value than Indian companies — represented in 62 per cent of all deals.

Sectors, players, key deals

The information technology (IT) sector dominated the M&A scene once again with the largest contribution by value as well as number of deals, with 40 deals adding up to 39 per cent of the total deal value. This is a remarkable jump compared to the first half of 2003 when IT deals made up a mere 5 per cent. Despite poor performance in H1 2003, IT had emerged as the dominant sector in 2003 with a 17 per cent share of the total deal value.

Telecom came second with nine deals contributing 25 per cent by value. Few other sectors contributed significantly, barring power (10 per cent) and pharmaceuticals and healthcare (8 per cent).

Information technology: All sub-sectors of the IT industry were active in H1 2004.

The largest deal in INDATA in H1 2004 is Singapore-based electronics manufacturer Flextronics' acquisition of a 75 per cent stake in Hughes Software Systems for Rs. 13.9 billion ($310 million) from the promoters, Hughes Network Services (Direct TV Group).

The deal included an open offer for a 20 per cent stake to the shareholders of Hughes Software. Hughes Software Systems supplies software to telecom companies worldwide.

Warburg Pincus increased its stake in Moser Baer from 24 per cent to 35.5 per cent by paying Rs 6.75 billion ($150 million) for a preferential allotment of Global Depository Receipts (GDRs) representing 14.7 million underlying shares and 5.4 million warrants. Moser Baer manufactures CD-ROMs and other optical media, which it exports to over 80 countries.

Despite the controversies around outsourcing to India, IBM bought 100 per cent of business process outsourcing (BPO) services provider Daksh eServices for Rs 6.75 billion ($150 million). Before the acquisition, General Atlantic Partners, Actis (formerly CDC Capital) and Citigroup held 65 per cent of Daksh, and the promoters and senior management held the remaining 35 per cent.

The BPO sub-sector saw significant activity with nine deals totalling Rs 10.8 billion ($239 million).

Another notable deal was the acquisition by Internet and long-distance telecom service provider VSNL (part of the Tata Group) of Dishnet DSL's Internet business from Sterling Infotech for Rs 2.8 billion ($62 million). The acquisition will give VSNL access to Dishnet's Internet subscribers and its network of over 600 cybercafes.

And, finally, eBay acquired 100 per cent of Internet auction Web site Baazee.com for Rs 2.3 billion ($51 million) from its promoters Avnish Bajaj and Suvir Sujan. Baazee is one of the few "dotcom survivors" in India and has 1,000,000 registered users although it is still not into profits. This deal suggests that overseas companies have faith in the potential of the online commerce market in India and the increasing sophistication of Internet users in India.

Telecom: The frantic deal activity in telecom was driven by consolidation of mobile service operations.

A last-minute entry from the telecom sector became the second largest deal in H1 2004. Hutchison Essar (a joint venture between Hutchison Whampoa of Hong Kong and the Essar group) announced the acquisition of 100 per cent of Aircel, a GSM cellular operator in Tamil Nadu. The all-cash Rs 12 bn ($267 million) deal will allow the company to use Aircel's licences and offer `Hutch' services to Aircel's 1.1 million subscribers, of which 31 per cent are in Chennai. Hutch, the third largest mobile operator after Bharti and Reliance, had only about 196,000 subscribers in Chennai before the deal.

Hutchison Essar acquired the stake from Sterling Infotech, a company promoted by Mr C. Sivasankaran. Sterling had acquired 21 per cent of Aircel (then named RPG Cellular Services) from Vodafone in H1 2003 and the remaining 79 per cent from the RPG Group in December 2003.

This deal is the first intra-circle merger transaction since the announcement of the intra-circle merger guidelines by the Telecom Regulatory Authority of India (TRAI) in February.

However, inter-circle consolidation began in January with Idea Cellular's acquisition of 100 per cent of Escotel Mobile Communications for Rs 2.75 billion ($61 million) in cash. Escotel was a joint venture between the Escorts group (51 per cent) and First Pacific of Hong Kong (49 per cent). Just as the Idea-Escotel deal was being completed in June, came the announcement of AT&T selling its 33 per cent stake in Idea Cellular to Singapore Technologies Telemedia and Telekom Malaysia for Rs 90 billion ($200 million). This is the third largest deal in India in 2004 so far.

The other major deal this year was Bharti Televentures' acquisition of a 67.5 per cent stake in Hexacom from Shyam Telecom for Rs 4.3 billion ($96 million). Before the deal, Shyam Telecom had exercised its "first right of refusal" and increased its stake in Hexacom from 40 per cent to 67.5 per cent for Rs 1 billion ($23 million).

Privatisation

No privatisation deals occurred in H1 2004, although there were a small number of IPOs of state-owned companies.

The new Congress-led Government, with Left alliance partners, is likely to keep all mention of privatisation to the minimum in the near-term.

Almost immediately on taking charge, the Minister for Chemicals and Fertilisers, Mr Ram Vilas Paswan, overruled the negotiations that had been under way for the acquisition of Hindustan Antibiotics by the private sector Sun Pharmaceuticals.

Private equity

The first half of 2004 saw 29 private equity deals contributing Rs 26.5 billion ($589 million), compared to 74 deals worth Rs 33.2 billion ($738 million) in the whole of 2003. The increasing size of private equity deals reiterates the rising comfort levels that Indian companies enjoy with international private equity investors.

The IT sector received the lion's share of private equity through 11 deals totalling Rs 11.1 billion ($248 million). The major deal in the sector was in IT hardware with Warburg Pincus' expansion of its stake in Moser Baer from 24 per cent to 35.5 per cent. Warburg Pincus paid Rs 6.75 billion ($ 150 million) for a preferential allotment of equity.

Deals abroad

INDIAN companies continued to acquire abroad in H1 2004.

A total of 24 deals totalling $846 million were announced by Indian acquirers of overseas targets.

The whole of 2003 had 49 such deals worth $1.8 billion.

The single largest deal was the acquisition of a 50 per cent stake in an offshore oil block in Angola by ONGC Videsh, a subsidiary of ONGC, for $602 million.

The most noticeable venture abroad was made by Indian pharmaceuticals companies such as Sun Pharmaceuticals (in the US), Jubilant Organosys (Belgium), Dr. Reddy's Laboratories (US), Wockhardt (Germany) and Glenmark (Brazil).

Together they made acquisitions worth $90 million.

(Source: India Advisory Partners, London.)

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