Confidence spurs Indian M&A surge

The value of M&A deals involving an Indian company has seen an increase this year compard with same period in the last two years. 

Merger and acquisition deal value 
Source: TheAustralian

JULY 04, 2014: Deal-making activity in India is off to its best start in at least three years, as companies and investors become optimistic about the country’s prospects.

Nearly $US35 billion ($37.3bn) worth of mergers and acquisitions involving an Indian firm as either a target or a buyer were announced in the first half of this year, versus $US21bn in the first half of last year and $US26.5bn in the same period in 2012, according to data from Dealogic. The last time India experienced this level of deal activity was in the first half of 2011.

Investment bankers say many deals that hung in the balance last year as India’s economy slowed have lately started to close. Companies have become more confident that India’s growth will pick up, partly due to optimism over the new government that came to power in May. Prime Minister Narendra Modi campaigned on a pro-business platform.

“There is certainly euphoria about what the new government can do,” said Ajay Arora, head of India investment banking at Ernst & Young.

Among the large deals announced this year are Mumbai-based Sun Pharmaceuticals Industries’ acquisition of Indian drugmaker Ranbaxy Laboratories for nearly $US4bn, Vodafone’s buyout of minority shareholders in Vodafone India, the British telecom giant’s Indian unit, for $US1.6bn, and Diageo’s acquisition of a 26 per cent stake in alcoholic-beverage company United Spirits for $US3.14bn.

Acquisitions by foreign companies are on the rise. In the first half of this year, inbound merger-and-acquisition deals totalled $US14bn, rising from $US11bn in value a year earlier, according to Dealogic.

Bankers say part of India’s current attraction is that its economic prospects look relatively better than some other countries in Asia. In China, growth has been slowing, and in Thailand a military junta recently seized power.

“India is seen as relatively safer in terms of political stability and security,” said Ganeshan Murugaiyan, head of India investment banking at BNP Paribas.

Investment bankers say companies in India’s fast-moving consumer-goods sector continue to be prime targets for overseas buyers, because these companies are expected to keep recording healthy returns as the economy picks up. Foreign companies have been looking at makers of liquor, including Delhi-based Radico Khaitan, which makes 8PM whiskey, Mumbai’s Tilak Nagar Industries, which makes Mansion House brandy, and Bangalore’s John Distilleries, bankers say. All three companies were unavailable for comment.

Indian pharmaceutical companies, which make generic drugs, also continue to be attractive targets for foreign firms.

Over the coming months, bankers say deal activity will also be driven by large Indian companies looking to dispose of assets to cut debt levels that grew when the country was booming five to seven years ago.

In February, Indian construction conglomerate Jaypee Group sold two of its hydro-electric power plants to a consortium led by Abu Dhabi National Energy Company for about $US1.6bn, in a bid to cut its debt.

“Pressure on some of those companies to sell will remain,” said Sanjay Bhandarkar, managing director at Rothschild (India).

Deals would also be driven by private-equity funds looking to exit investments that were made five to seven years ago, said Anup Bagchi, executive director at Mumbai-based investment bank ICICI Securities. Private-equity funds have had trouble exiting their investments over the past two to three years as they found it difficult to raise new equity locally and as the Indian rupee lost value against the US dollar.

Bankers caution that though many discussions are under way, deals will close only if Indian sellers are realistic about valuations. As Indian stocks have risen this year, “expectations of Indian founders have also risen”, said Vinod Wadhwani, director of investment banking at Mumbai-based Ambit Corporate Finance.

Bankers say overseas acquisitions by Indian companies this year will be limited mainly to major energy companies, which have historically been on the hunt for foreign coal or gas reserves.

The “search for resources will always be there,” said Anantharaman Venkataraman, head of investment banking at Standard Chartered in Mumbai. He said state-run ONGC Videsh, the overseas investment arm of state-run Oil & Natural Gas Corporation, and Coal India will continue to look at acquiring overseas assets.

Both companies declined to comment.

Courtesy: The Australian