(James Winterbotham,Sridar Swamy – Business Line)
The year 2007 turned into a remarkable one for Indian M&A, both at home and abroad. Spending more money on overseas acquisitions than foreign companies did in their own market, Indian companies have made their presence felt globally. Domestically, 2007 saw another record year of deal activity, with total mergers and acquisitions (M&A) and private equity (PE) deals up 82 per cent from Rs 865 billion ($21 billion) in 2006 to Rs 1,576 billion ($38 billion) in 2007. As well as volume, both number (867 against 697) and average size of deals also rose significantly.
International acquirers have continued to account for the bulk of domestic deals at Rs 1,189 billion ($29 billion). This is 75 per cent of the total domestic deal value as against 71 per cent in 2006. But the real story of the year is overseas, where Indians bought up companies in Europe and the US, splashing out some Rs 1,367 billion ($33 billion).
M&A activity
Strategic investments, as opposed to PE deals, continued to dominate M&A activity with a share of 70 per cent. While the first half was marked by a few big ticket deals, with average deal size being Rs 2,944 million ($72 million), in strategic investment, the second half saw many more smaller deals with average deal size at Rs 735 million ($18 million).
Private equity investments
In private equity, 2007 saw the entry of more of the large international players such as Apax Partners The US accounted for approximately 45 per cent of the total PE investment into India, followed by 18 per cent from Asia (ex India) and 12 per cent from Europe. The total PE investments into listed companies (“PIPE” deals) stood at 33 per cent as compared to 35 per cent in 2006.
In total, in 2007, there were 262 private equity transactions worth Rs 466 billion ($11 billion), a growth of 35 per cent over 2006. The financial services sector was the most attractive attracting a share of 33 per cent of the total, followed by telecoms with 13 per cent and media with 6 per cent.
The largest PE deal of the year was Temasek Holdings, along with ICD, Macquarie, AIF Capital, Citigroup and India Equity Partners, acquiring a 10 per cent stake in Bharti Infratel, a telecom tower subsidiary of Bharti Airtel, for Rs 41 billion ($1 billion).
Other major deals included Goldman Sachs, Swiss Re and Nomura acquiring a 6 per cent stake in ICICI Financial Services, a financial services holding company, for Rs 27 billion ($646 million); and Carlyle acquiring a 6 per cent stake in HDFC Ltd., a housing finance company, for Rs 26 billion ($643 million).
The year 2007 also witnessed a deepening of investment by other major investors in India. Blackstone made investments in Gokaldas Exports ($160 million), Nagarjuna Construction ($150 million), Ushodaya Enterprise ($146 million), Intelenet Global ($85 million) and Sparsh BPO ($16 million).
Sectors, Key deals
Unlike in the past when growth was led by a few sectors, 2007 has seen a more broadly based activity. The telecom sector overtook the IT Industry and dominated the M&A scene with a 33 per cent share in the total deal value. It was followed by finance with a 15 per cent share, cement and building material 7 per cent, oil and gas 5 per cent and metals 5 per cent. One of the emerging sectors for this year has been aviation, shipping and logistics accounting for 4 per cent of total deal value.
Telecom
23 deals, totalling Rs 514 billion ($13 billion)
The largest deal of the sector was Vodafone acquiring a 67 per cent stake in Hutchison Essar, now Vodafone Essar, India’s fourth largest telecom player. With more than five contenders, including India’s Reliance Infocomm, Egypt’s Orascom and Malaysia’s Maxis amongst others, the deal finally concluded in March 2007 after a three month long battle. Vodafone paid Rs 447 billion ($10.9 billion) for the stake. It also paid a further Rs 17 billion ($415 million) to Essar Group to secure management control of the company.
With companies’ profits from customers being squeezed by stiff competition, selling stakes in their telecom tower businesses or sharing towers became an appealing avenue for mobile telecom companies. The second largest deal of the telecom sector was the sale by Bharti of a 9 per cent stake in Bharti Infratel for Rs 41 billion ($1 billion).
Other companies that sold stakes in their tower businesses included Reliance Telecom Infrastructure and Aster Infrastructure. Recently Bharti Infratel, Vodafone Essar and Idea Cellular merged their tower businesses to form a new entity Indu Tower Ltd.
Finance
164 deals, totalling Rs 233 billion ($6 billion)
The Indian financial services sector continued to attract overseas and domestic investments, taking 15 per cent of the total deal flow by value and 19 per cent by number. The share of PE deals was over 65 per cent. The largest deals in the sector were the $646 million investment in ICICI Financial Services and the $644 million investment in HDFC Ltd.
The year also witnessed the separation of several foreign partners from their Indian joint ventures in a quest to go solo. Morgan Stanley acquired JM Morgan Stanley’s securities business for Rs 20 billion ($480 million) while JM Financial retained the investment banking business for Rs 900 million ($22 million). Similarly, ASK Investment Financial Consultants bought 50 per cent stake in ASK Raymond James Securities India Pvt. Ltd. from its foreign partner, Raymond James.
The securities broking segment was the largest recipient of the investment with a 26 per cent share. Among the bigger deals were Citigroup Venture Capital’s acquisition of 75 per cent in Sharekhan for Rs 7 billion ($170 million) followed by Orient Global Tamarind Fund acquiring a 6.5 per cent stake in India Infoline for Rs 5.6 billion ($135 million) and ICICI Venture and Baring together acquiring 32 per cent stake in Karvy Stock Broking for Rs 5 billion ($122 million).
The second largest segment to attract investors was the stock exchanges, accounting for a 21 per cent share, with National Stock Exchange and Bombay Stock Exchange attracting investments worth Rs 25 billion ($608 million) and Rs 24 billion ($576 million) respectively from various PE and trade investors.
Cement and building materials
23 deals, totalling Rs 112 billion ($3 billion)
The sector made up for 7 per cent of the total deal value out, of which 87 per cent was driven by a single acquirer, Holcim. Holcim strengthened its position in India by increasing its holding in Ambuja Cement from 22 per cent to 56 per cent through various open market transactions and an open offer for a total investment of Rs 75 billion ($1.8 billion).
It also increased its stake indirectly by 12 per cent in ACC Cement for Rs 20 billion ($486 million). Imerys from France acquired Ace Refractory from ICICI Ventures for Rs 6 billion ($134 million). The average PE in the sector was 13 x (TTM).
Oil and Gas
16 deals, totalling Rs 85 billion ($2 billion)
Reliance Industries (RIL) alone accounted for 68 per cent of the total deal value with its two deals. Mukesh Ambani, along with associates, consolidated his holding in RIL through an issue of convertible warrants which, upon conversion, would increase his stake to 55 per cent in the Company.
RIL enhanced its already strong position in the sector with the merger of Indian Petrochemicals Corporation (IPCL) into RIL at a deal size of Rs 42 billion ($1 billion). RIL had acquired 26 per cent in IPCL in 2002 from the government and an additional 20 per cent through a consequent open offer. Another important transaction was by German company Linde AG. Linde increased its holding in BOC India from 55 per cent to 74 per cent through a preferential allotment of equity shares. It paid approximately Rs 6 billion ($146 million) for the stake.
Metals
32 deals, totalling Rs 87 billion ($2 billion)
The metal sector accounted for 5 per cent of the total deal values. The largest deal in the sector was Vedanta’s acquisition of a 71 per cent stake in Sesa Goa, 51 per cent from Mitsui & Co and 20 per cent through an open offer, for a total consideration of Rs 56 billion ($1.4 billion). Another major transaction was the investment of Rs 13 billion ($320 million) by Aditya Birla Group companies to consolidate their position in Hindalco Industries through a preferential allotment.
Other Sectors
The media sector (4 per cent) saw 45 deals and a lot of private equity interest with the largest deal being the investment of Rs 11 billion ($259 million) by Temasek investing in Inx Media, a TV broadcast company. Other deals included an investment of Rs 7 billion ($166 million) by South Asia Entertainment Holdings Ltd. (a group company of Astro All Asia Networks Plc) in Sun Direct TV for a 20 per cent stake and Blackstone in Ushodaya Enterprise taking a 26 per cent stake for Rs 6 billion ($146 million).
Engineering had a 4 per cent share in total deal value with its largest deal being the acquisition of Anchor Electricals by the Japan-based Matsushita for Rs 20 billion ($488 million). In the automotive sector (automotives and auto components 3 per cent) Robert Bosch acquired an additional 9 per cent stake in its subsidiary Motor Industries Co. through an open offer, for Rs 14 billion ($330 million) increasing its holding to 70 per cent. Also, M&M acquired 63 per cent stake in Punjab Tractors for Rs 14 billion ($340 million) which increased its share in the tractors market to 40 per cent. The aviation sector (2 per cent) saw consolidation with a few large deals. Jet Airways took over Sahara Airline, and Kingfisher Airlines acquired a significant stake in Deccan Aviation. Separately, the Government decided to merge operations of the two state owned carriers, Indian Airlines and Air India.
Overseas deals
India everywhere
The year 2007 proved to be a phenomenal one for India Inc abroad. Full of adventure, it saw some exceptional deals — Tata acquiring Corus and Hindalco acquiring Novelis. This was the first year since INDATA has been recording M&A activity in India; overseas M&As by Indian companies exceeded the investment by foreign companies into India.
In all, there were 223 deals worth Rs 1,367 billion ($33 billion) registering a massive growth of 300 per cent over the previous year (140 deals worth $ 8 billion). The average deal size increased from $58 million in 2006 to $150 million in 2007. This underlines Indian companies’ readiness, enthusiasm and confidence to go global. Europe and the US, being favoured destinations, attracted 54 per cent and 27 per cent of the total investments overseas respectively.
The overseas M&A activity was dominated by the metal sector taking 56 per cent of the total investments. Its two large deals were the Tata/Corus deal and the Hindalco/Novelis one. Other sectors attracting large investments were engineering, information technology and oil and gas. The largest deals in the respective sectors were: Suzlon Energy acquiring Repower Systems for $1.8 billion; Wipro Ltd. acquiring Infocrossing Inc for $557 million; and Aban Offshore increasing its stake in Sinvest from 37 per cent to 97 per cent for $774 million.
Top Deals
The largest deal of the year was India’s steel giant, Tata Steel, acquiring Anglo-Dutch giant Corus. After a four-month battle, Tatas finally defeated the rival bidder CSN, paying a premium of 34 per cent over the original bid price made in October 2006. Tata Steel paid $12.1 billion for Corus’ 18 million ton steel capacity. The deal made Tata Steel the world’s sixth largest steel manufacturer.
Another high-profile, multi-billion dollar deal was by leading copper and aluminium manufacturer Hindalco. Hindalco spent $3.33 billion to acquire Atlanta-based Novelis, a leading aluminium sheet maker. The deal brought in the readymade cans and screw-caps market in the US with the two most famous clients — Coca-Cola and Anheuser-Busch. It also provided Hindalco with a significant presence in the automotive and transportation industry making it one of the world’s largest aluminium rolling companies.
The third largest cross-border deal of the year was Suzlon Energy acquiring Germany-based Repower for $1.8 billion. The deal was finalised only after the withdrawal by the French nuclear energy group Areva after four long months. With this acquisition, following the acquisition of component supplier Hansen last year, Suzlon has further consolidated its position in the international wind energy market.
Some other large cross-border deals included Essar Group acquiring Canada-based Algoma Steel for $1.6 billion and United Spirits acquiring UK-based Whyte & Mackay for $1.2 billion.
Looking ahead
A growing economy, robust financial performance and an exceptionally buoyant stock market have all supported a remarkable expansion of M&A activity, and there seems little to upset this trend in the immediate future. Emerging markets’ insulation, to date, from the global credit crisis suggests that domestic M&A activity, strongly supported by foreign investment, will continue, although the tightening of credit could restrain the exuberance of Indian companies overseas.
In the local market, we would expect to see a focus on vertical integration by strategic investors, especially in mining, metal and energy sectors. PE investors are likely to continue to book profits with valuations at high levels, while continuing to invest in sectors such as infrastructure and real estate. We also expect some consolidation in sectors including offshore shipping, logistic, media, and Defence, as well as in pharmaceuticals, which have been very quiet in 2007 and may well be due for a revival.
Source: Business Line