The year 2008 began keeping pace with the heightened deal activity in 2007 and saw the completion of the much anticipated Tata Motors’ acquisition of the two marque brands Jaguar and Land Rover for $2.3 billion from Ford Motors. However, the downturn in the global and domestic economies seems to have impacted India’s M&A scenario.
While the total number of transactions fell from 663 in the first half (H1) of 2007 to 467 in H1 2008, the total deal value saw a sharp slump, dipping by over 40% from US$38.4 billion in H1 2007 to US$21.4 billion in H12008. The sectors which have been driving the strategic M&A activity include Pharmaceuticals, IT&ITeS , Banking & Financial Services (BFSI) and Real Estate. The outbound investments accounted for US$ 8.2 billion of M&A activity spread over 96 deals.
Financing overseas acquisitions has been tougher this year owing to the global market conditions , and, the increase in domestic borrowing cost, caused by higher borrowings, has not helped either. Expanding credit squeeze in global markets/ global credit crunch, high oil prices and rising inflation are some of the reasons for the slight slowdown in M&A activity in the first six months of 2008.
In terms of debt, even obtaining financing of four to five times EBITDA (as opposed to six or seven, available earlier) is going to be a key challenge. As a result, India Inc. has largely relied on the strength of their own balance sheets and cash flows, apart from the FCCB and QIP routes. There have been some near-misses however, which would added to the tally, including Essar’s bid for Esmark, where they have been outbid by Severstal.
However, corporate India’s overseas acquisitions are continuing to make global footprints . Outbound investments by Indian companies continued to grow, touching US$8.2 billion spread across 96 deals. The valuations have fallen globally and have made it easier for Indian firms to acquire businesses overseas. Though, with interest rates hardening, leverage financing will take a hit, making it difficult to finance large buyouts .
Firms with strong balance sheets may look for bargain buys. As Indian corporates continue to do M&A transactions overseas, dealing with more mature markets such as US, UK, Canada and Singapore they have been undergoing a continuous learning process — be it facing competition from global peers or various regulatory issues — such as the ongoing attempt by Sterlite Industries to acquire Asarco LLC which has run into rough weather with a counter-offer from the latter’s promoter, Grupo Mexico.
The year 2008 began keeping pace with the heightened deal activity in 2007 and saw the completion of the much anticipated Tata Motors’ acquisition of the two marque brands Jaguar and Land Rover for $2.3 billion from Ford Motors. However, the downturn in the global and domestic economies seems to have impacted India’s M&A scenario.
While the total number of transactions fell from 663 in the first half (H1) of 2007 to 467 in H1 2008, the total deal value saw a sharp slump, dipping by over 40% from US$38.4 billion in H1 2007 to US$21.4 billion in H12008. The sectors which have been driving the strategic M&A activity include Pharmaceuticals, IT&ITeS , Banking & Financial Services (BFSI) and Real Estate. The outbound investments accounted for US$ 8.2 billion of M&A activity spread over 96 deals.
Financing overseas acquisitions has been tougher this year owing to the global market conditions , and, the increase in domestic borrowing cost, caused by higher borrowings, has not helped either. Expanding credit squeeze in global markets/ global credit crunch, high oil prices and rising inflation are some of the reasons for the slight slowdown in M&A activity in the first six months of 2008.
In terms of debt, even obtaining financing of four to five times EBITDA (as opposed to six or seven, available earlier) is going to be a key challenge. As a result, India Inc. has largely relied on the strength of their own balance sheets and cash flows, apart from the FCCB and QIP routes. There have been some near-misses however, which would added to the tally, including Essar’s bid for Esmark, where they have been outbid by Severstal.
However, corporate India’s overseas acquisitions are continuing to make global footprints . Outbound investments by Indian companies continued to grow, touching US$8.2 billion spread across 96 deals. The valuations have fallen globally and have made it easier for Indian firms to acquire businesses overseas. Though, with interest rates hardening, leverage financing will take a hit, making it difficult to finance large buyouts .
Firms with strong balance sheets may look for bargain buys. As Indian corporates continue to do M&A transactions overseas, dealing with more mature markets such as US, UK, Canada and Singapore they have been undergoing a continuous learning process — be it facing competition from global peers or various regulatory issues — such as the ongoing attempt by Sterlite Industries to acquire Asarco LLC which has run into rough weather with a counter-offer from the latter’s promoter, Grupo Mexico.
PE ACTIVITY
Private Equity Investments across the globe have been hit by the non-availability of leverage, and it was expected that India would be different since most private equity investments in India are for growth capital.
However the over 35% fall in the Indian stock markets meant that both the private equity investors and the promoter community have shied away from committing themselves — while the PE investors have been wary of investing even at current levels, expecting a further correction, promoters too have been wary of diluting equity at this stage — as a result the PE activity has slowed down, and the impact thereof is likely to be more visible in H2 2008.
The first half of 2008 saw over 160 deals and deal value crossed US$ 6 billion. A weak IPO market has discouraged Indian corporates to go for public listing, hence many small and mid-sized companies are now tapping the private equity route. Going forward, some of the factors that could pose challenges to PE investments in India include lower growth rates for export-based industries due to strong rupee, higher oil prices which is one of the reasons behind high inflation and potential capital gains tax on external funds routed through Mauritius.
However, PE funds continue to have confidence in the Indian growth story and a number of them have raised India dedicated funds , including with 3i and JP Morgan which raised India Infrastructure funds closing at $1.2 billion and $2 billion respectively. Helion Venture Partners closed its second vehicle with $210 million and UK based Eredene Capital Plc. is raising $300-500 million to invest in the logistics sector in India.
CDC Group, the UK government-backed emerging markets fund of funds investor , will invest $250 million in three India focused infrastructure and real estate funds and in total will raise $ 1.6 billion for investment in India. With foreign PE funds raising India dedicated funds, homegrown funds are also trying to raise larger capital for investing in the domestic market. ICICI Venture Funds is raising two India dedicated funds for a combined value of $3 billion.
OUTLOOK
Despite the lower GDP growth achieved in FY07-08 , and the uncertain political environment in India at this stage, on the economic front vis-à-vis FY06-07 , there is optimism that India would manage a GDP growth of 9% this year too. A higher than anticipated growth in Agriculture and Services are expected to be the key drivers, with investment, too, remaining buoyant.
As per the Ministry of Commerce and Industry, though the rising interest rate is affecting the cost of production, Industry would sustain a growth momentum of 8–9 % in 2 0 0 8 – 0 9 . W h i l e Manufacturing too is expected to do better this year, hardening of interest rates and potential demand limitation factors caused by Government’s macro economic policy may impede growth. However, strong economic growth, combined with continuation in reform process and improvements in infrastructure by the Indian government, is likely to boost FDI and deal activity.
Softening of valuations in India have resulted in larger in-bound interest this year, and as Indian business houses evaluate the impact of the changing global economic scenario on their businesses, we could witness transactions like the Ranbaxy–Daiichi deal. Some amount of domestic consolidation is also expected. After a period of opportunistic investing, PE activity too is expected to pick up by the last quarter of 2008, as valuation expectations settle.
Some recent regulatory changes which are expected to influence M&A activity in 2008 include:
In an effort to impart more flexibility in overseas investment, Indian companies in the energy and natural resources sectors, such as oil, gas, coal and mineral ore, have been permitted to invest overseas in excess of 400% of their net worth.
While overseas investment upto 400% is under the automatic route, the investment in excess of 400% will need prior approval of the Reserve Bank of India (RBI). This is likely to help Indian outbound investments , specifically in the upstream oil and gas and mining sectors, and result in larger overseas deals by Indian oil & gas and mining majors.
The Indian government has relaxed external commercial borrowing (ECB) norms, and now allows companies to undertake borrowings of up to $50 million (earlier permissible limit $20 million) for incurring rupee expenditure for permissible end use under the RBI’s Approval Route. In the case of borrowers in the infrastructure sector, the limit has been fixed even higher at $100 million.
As anticipated, the guidelines for easing foreign investment in key areas such as Commodity Exchanges and Credit Information Companies (CIC) have been finalised . Overall foreign investment of up to 49% is permitted in Commodity Exchanges, with specific prior approval of the Government. However investment by way of FDI is limited to 26% and by FII’s is limited to 23%. Overall foreign investment of up to 49% is permitted in Credit Information Companies (CIC) with specific prior approval of the Government and clearance from Reserve Bank of India (RBI) However, investment by way of FIIs is permitted up to 24% only in CICs listed on the stock exchanges. Here’s hoping for a better H2 2008.
(Sanjeev Krishan : The author is a director at PWC)
Source: Economic Times