Sunday, December 12, 2010

India Inc sets its sights on big deals abroad

If M&A activity is a harbinger of economic outlook and business confidence, then Indian corporates have had a great 2010 so far.

Not only did the year see merger and acquisition (M&A) deal values shoot past the 2007 high, it also saw the return of mega deals and risk appetite among corporates, reveals the data put out by Thomson Reuters and Ernst & Young analysis.

As the calendar year draws to a close, here's a look at what drove the M&A moves of Corporate India in 2010.

Foreign assets turn more attractive

After shying away from overseas acquisitions in 2008 and 2009, Corporate India seems to have found a fancy for foreign assets yet again.

The year so far (from January to November 2010) has recorded a total of $25 billion in deal value.

This is a whopping 23 times the deal value reported in 2009, when problems faced by some of the large buys of 2006 and 2007 and funding constraints had reined India Inc.'s global dreams.

What's more, the outbound deal value for the year is twice that of 2007 ($13.6 billion), when M&A value last peaked. This reflects the growing confidence among Indian companies, both in the economy and in their own business outlook.

Notably, a good number of outbound deals during the year were done to secure raw material supply. This is in contrast to the past, when buying brands, expanding geographies and acquiring operational control were the key motives.

Prominent examples are the $4.8-billion deal involving ONGC, IOC and Oil India to jointly develop a crude oil block in Venezuela with Spain's Repsol YPF SA and Malaysia's Petroliam Nasional Bhd, Reliance Industries' purchase of shale gas assets, Adani Enterprises' acquisition of Linc Energy Limited's Coal Tenements in Galilee Basin and the $600-million Essar Group-Trinity Coal Corporation deal.

Other emerging markets in focus

What's also remarkable is that Indian companies now seem to be increasingly looking at other emerging markets for buyouts.

This is unlike a few years ago, when corporates would look at only developed economies such as the US and the UK. Some of the prominent deals that highlight this emerging trend are Bharti-Zain (Africa), Shree Renuka Sugars-Equipav SA (Brazil) and JSPL-Shadeed Iron & Steel Company (Oman).

The backtracked Fortis-Parkway (Singapore) deal too underscores the same trend.

The year also saw mega outbound deals make a comeback, with such agreements (valued more than $1 billion) making up over half the value of all announced mega deals in the first three quarters this year.

Outbound deals, therefore, saw a drastic improvement in their share of outbound deals in the overall M&A pie. From a meagre 5 per cent seen in 2009, they now make up 46 per cent of the total value.

But, then, while outbound deals dominated the M&A scene this year, the growth in deal volumes was relatively modest.

Volumes increased by little under half the number reported in 2009 and are lower than the volumes reported in 2007 and 2008.

‘India lure' remains

But even as Indian corporates hunted overseas to add assets, global firms continued to look at India as a growth option.

The lure of strong domestic prospects in India apart, the trend was probably helped by stagnating growth in the US and Europe and cheap money too.

Inbound deals for the year totalled $16.4 billion (230 deals), more than doubling from the $7.3 billion (246 deals) announced in 2009.

The higher deal values, in spite of a lower deal count, may be attributed to the rising market valuations in India.

This is reflected in some of the mega deals this year, where acquirers paid lofty sums to lap up attractive assets.

Some of the prominent inbound deals during the year were Vedanta Resources' $9.6-billion proposal to purchase of majority stake in Cairn India, the $3.8-billion Abbott-Piramal transaction and $1-billion deal between Japanese steel-maker JFE Holdings and JSW Steel.

The share of inbound deals in the total M&A pie, however, fell to about 31 per cent from the 36 per cent seen last year.

What also merits attention is that even as global companies did India-bound deals, the total deal value hasn't surpassed the boom of 2007, when $31.5 billion worth of deals were announced.

Interestingly, the deal value remains lower, even after excluding 2007's high-flying Vodafone-Hutchison Essar deal. Vodafone Plc shelled out about $11.1 billion for 67 per cent stake in the latter. Rising market valuations in India could probably have acted as a mild deterrent as global firms would have had to shell out a lot more for Indian buys than buys in other geographies.

Domestic deals overshadowed

While in 2009 companies were keen to buy domestic assets, driven by the financial crisis that diverted attention homewards, 2010 saw some of that sheen wear off. Not only were there fewer deals, the total deal value, at $12.4 billion, recorded only a 3.2 per cent growth over the $11.9 billion announced value in 2009.

Recovering global economies, rise in risk appetite and, to an extent, the firming valuations of domestic companies may have kept the appetite for domestic deals relatively low.

India Inc's growing appetite for mega outbound deals too may have curtailed the action in home markets.

Among some of the well-known domestic deals during the year were GTL Infra's $1.8-billion purchase of Aircel's tower portfolio, merger of Reliance Natural Resources and Reliance Power ($1.5 billion), Reliance Industry's purchase of 95 per cent stake in Infotel Broadband Services, ICICI Bank-Bank of Rajasthan and the more recent Axis Bank-Enam transactions.

More big-ticket acquisitions

The average ticket size of mergers and acquisitions done by India Inc. has grown considerably in the last couple of years.

From $16.5 million in 2009, when there were 1,235 deals for an aggregate deal value of $20.3 billion, the average deal value has increased to $51.4 million in 2010 (1,047 deals for an announced value of about $53.8 billion).

Notably, it is also higher than the average deal size of $44.4 million seen in 2007.

This not only highlights corporate India's growing thirst for better assets, it also underscores rising confidence and risk appetite to lap up assets despite their seemingly high valuations.

But if industry soothsayers are to be believed, the M&A action in India has just about begun.

While on one hand, global firms are increasingly turning towards emerging markets especially India and China, on the other, Indian companies are becoming bolder with their expansion aspirations.

The Capital Confidence Barometer survey conducted by E&Y in October 2010 too reflects the growing optimism among Indian corporates.

According to the survey's findings, Indian companies continue to remain optimistic about the prospects of their economy, scoring 92 per cent against a global average of 67 per cent.

So, will the optimism necessarily translate into bigger deals and higher deal volumes? Perhaps yes, but a lot will also depend on the availability of right assets and at the right price.

While spotting right assets is not going to be easy, it perhaps will be the valuations of companies that could be a limiting factor.

With Indian companies attracting a lot of global attention, price tags are sure to rise further.

This makes access to liquidity too a key deciding factor. With domestic interest rates inching upwards, access to cheap funds will be more difficult. The much-debated 100 per cent mandatory open offer rule proposed under the new Takeover Code too could be a deterrent, if finalised in its present form.

The Hindu Business Line : India Inc sets its sights on big deals abroad


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