Last year witnessed NM Rothschild holding an auction for the buyout of MTR Foods, Arcil holding an auction for the Daewoo plant and of course the much publicised Hutch buyout, which has become an auction of sorts. More recent is the Scandent group looking at unlocking value from Cambridge Solutions.
This year will see an increasing number of buyouts, some accompanied by auctions. According to sources in investment banking, Kotak Mahindra, JM Morgan and Merill Lynch have all been mandated by various companies in the pharma and the auto component space to hold auctions on their behalf.
Buyouts are all set to be propelled by family businesses carving out non-core, non-performing units and by certain public companies wanting to turn private. While certain buyouts will be a sale to a large buyout fund, others will be companies looking at orchestrating an auction to maximise price.
“Buyouts are inevitable with certain companies looking at rationalising business and the availability of liquidity, large buyout funds and developing capital markets,” says V Shankar, group head, corporate finance, Standard Chartered Bank. In the Natsteel buyout, Standard Chartered was assisting Tata Steel and prevented the buyout from going into an auction by pointing out the synergies between the steel firms.
According to experts, investment banks are increasingly going to be generating their fees from PE players and hedge funds. Currently in the US, I-banks generate 50% of their fees from PE and hedge funds, in Europe it is close to 30% and in India it is pegged between 5% and 7% and expected to go up to 30% in the next two years. And obviously, the big money is generated from buyouts rather than PE players acquiring minority equity stakes.
For sellers looking at unlocking value, while an auction is the best way to maximise price it also means an excessive amount of due diligence. But that does not deter companies, as buyouts as a trend is all set to gain momentum. “We are involved in a couple of transactions. Each one means a detailed due diligence for 6-9 months,” says Falguni Nayar, MD, Kotak Mahindra Capital.
When it comes to buyouts, India is closer to Europe due to the family business culture. With the earlier generation diversifying into non-core business, the present generation is looking at streamlining the business and thus creating opportunities for buyout funds. “We could also see public companies going up for auctions when they try and turn public because of fiduciary responsibilities,” says Neeraj Bharadwaj, MD and country head, Apax Partners.
Going forward, many expect 2007 to be the year of auctions in the Indian PE landscape. “Auctions are on the rise and this year could witness a lot more deals as the mindset is already changing and bankers are being appointed by companies,” said Sri Rajan, partner, Bain Partners.