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High liquidity, quality assets and hunger for growth have spurred India inc. to indulge in an M&A spree

By: Krishna Gopalan
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Often, it’s just gut feeling. Ask dealmakers how they identify an opportunity and this is the most likely answer. It helps them spot a transaction ahead of time and quickly plan on making that big move. One such instance is the recent buyout of Holcim’s India assets by the Adani group.

Narrating the sequence of events, a veteran investment banker says it was clear to him in early 2018 that the Switzerland-headquartered cement major was having a relook at its India business. A year before that, the two companies that Holcim owned here—Ambuja Cements and ACC—independently spoke of considering a merger. Suddenly, everything went cold. The symptoms were all there. “As competition was acquiring assets in a hurry, the lack of action at Ambuja and ACC stood out,” he says. At that point, murmurs abounded that the time taken to acquire land or limestone reserves had been frustrating for Holcim. In reality, they were merely biding time since a decision had all but been taken. First, in mid-2018, the merger plan was dropped and, finally, this May, the 70 million tonnes of cement manufacturing capacity that the two companies owned exchanged hands, with the Gautam Adani-headed group sealing the deal for $10.5 billion.

MEGA DEAL: (from left ) HDFC Bank MD & CEO Sashidhar Jagdishan,
HDFC Chairman Deepak Parekh,
HDFC Bank Chairman Atanu Chakraborty and HDFC Vice Chairman
& CEO Keki Mistry during the announcement of the HDFC-HDFC Bank merger.

Now, for almost a year and a half, the activity levels on deal street have remained unabated—data from Dealogic says the total value of India-targeted M&As for 2021 was $109 billion, while the number for 2022 (till early May) stood at $96 billion, not including the Adani buyout. The joke among bankers is that this period is seeing “pent-up frustration” after the pandemic. The mood is enthusiastic, the amounts being spoken of are not small, activity is across sectors, but with some marked differences from the past. India Inc. is not craving for overseas assets, although there is no paucity of funding. There are good businesses to be bought in India and it’s not just the companies in the midst of action. Private equity (PE) funds are acquiring controlling stakes as opposed to the minority holding or perhaps a board seat they normally settled for.


Past and present

Just what is driving this M&A frenzy? A closer look reveals it is only a culmination of what has taken place over the past seven years. The period between 2015 and 2020 revolved around companies in distress. Prominent deals concluded then include the acquisition of the Ruia family-promoted Essar Oil by Russian energy major Rosneft; Tata Steel’s buyout of Usha Martin’s steel business; Hathway Cable and Den Networks selling out to Reliance Industries; and the Murugappa Group taking over the scam-hit CG Power.

The tipping point, say investment bankers, was Rosneft cutting a cheque for $12.9 billion to acquire Essar Oil. Reeling under debt of over Rs 1.8 lakh crore before the deal, the Essar group, with a presence in steel, power and oil, was under tremendous pressure from lenders—a consortium led by the State Bank of India and ICICI Bank. A former SBI official recalls a meeting when the message from the bank’s top brass, at the peak of the Rosneft deal being negotiated, was devoid of any ambiguity. “We have to get our money back at any cost. This deal is critical,” was all that was said. Lenders, at that point, were a harried lot with the poor quality of borrowers in India across many large industrial groups not helping their cause. The sale of Essar Oil took place in August 2017 and the ushering in of the Insolvency and Bankruptcy Code (IBC) around that time opened the floodgates for the sale of good assets that had been managed poorly. From distress, the next step shifted towards the potential acquisition of names such as Bhushan Power, Essar Steel, Alok Industries, Electrosteel Steels, JP Infra, Monnet Ispat and Lanco Infratech. This phase also saw the “forced exit” of cement company Lafarge from India, which, together with Holcim, would have had a monopoly in the eastern part of the country. Lafarge sold its cement capacity of 11 million tonnes to the Nirma group’s cement entity for $1.4 billion—the deal was necessary to complete the global merger of Holcim and Lafarge.  

Cut to the period starting 2021 and M&As have been flying thick and fast. The successful sale of distressed assets and the IBC seem to have provided the impetus. Now, India Inc. boasts of companies with better-looking balance sheets, and firms are on a stronger wicket, with default not being a monster in the room. A more efficient corporate culture has led to banks being willing to lend large sums of money—the end result is high levels of liquidity in the system, allowing groups and companies to get very ambitious. Raj Balakrishnan, Head of Investment Banking at Bank of America, says that the current M&A story is driven by strategic drivers for acquirers and sellers. “The availability of liquidity is an enabler, but the key driver continues to be strategic rationale. For example, Shell’s acquisition of Sprng Energy is driven by its desire to be positioned as one of the first movers in building a truly integrated energy transition business in India,” he says. In line with the theme of strategic M&As, one has seen the HDFC-HDFC Bank merger or LTI and Mindtree coming together to create India’s fifth-largest IT firm.

The availability of liquidity is an enabler, but the key driver continues to be strategic rationale. For example, Shell’s acquisition of Sprng Energy is driven by its desire to be positioned as one of the first movers in building a truly integrated energy transition business in India.

Raj Balakrishnan
Head of Investment Banking
Bank of America

The inorganic route saves time and, if negotiated well, brings to the table a good asset at a fair valuation. Pritish Kandoi, EVP for Investment Banking at ICICI Securities, reckons M&As are explored to meet shareholder expectations of growth and returns. “Deals are typically driven by a need to build scale in a short time, enter new geographies, add new products/service lines, or build capability around customer experience and distribution.” He cites the example of BYJU’S investing over $2 billion for 11 acquisitions, including the purchase of Aakash Educational Services, an online test-prep company. “Here, it was to build an omni-channel vertical for its test-prep vertical. There is also the case of PharmEasy with its multiple acquisitions to enter new verticals, which included a significant majority stake in Thyrocare to strengthen its high-margin testing business by tapping into Thyrocare’s network of collection centres,” says Kandoi.  

The M&A story continues across large business groups. For instance, Reliance has made buyouts in areas like renewable energy, retail and fashion, while Adani, too, has made big moves in renewables, ports, FMCG and, of course, cement. Then, the Tatas acquired Air India from the government and in two years, concluded 21 deals, while the Mahindra group decided to exit loss-making SsangYong (which it had acquired in 2010), as it has been in the red for a long time, though it is yet to find a buyer.

If it is a high-quality business, we are happy with minority stakes as well as control, depending on the entrepreneur’s preference.

Kunal Shroff
Managing Partner
ChrysCapital


Going overseas? Not really

The cross-border outbound story in the past, especially in the period starting 2007 for about five years, saw frenetic levels of activity. That is not as prominent today and is one more indication of how the M&A story has changed.   

Bank of America’s Balakrishnan thinks the theme continues to be played selectively by Indian companies in spaces where there are material synergies. “For example, in IT services, we worked with Wipro to acquire Capco (a deal struck last year for $1.5 billion). However, in several other sectors, Indian groups have found significant opportunities driven by rapid growth in the Indian market and, hence, continue to play this story,” he says.   

Speaking of IT, C. Vijayakumar, CEO of HCL Technologies, says making a buyout overseas will today need to be “capability-based”. That thinking is in line with a new set of market dynamics. In late 2018, his company acquired select IBM software products for $1.5 billion. “Three years ago, it was all about the product business for us. Now, the task on hand is to grow it. As things stand, there is no need for that big-ticket buyout.”

Ganeshan Murugaiyan,
MD (Head of Corporate Coverage & Advisory),
BNP Paribas

Ganeshan Murugaiyan, MD and Head of Corporate Coverage & Advisory at BNP Paribas, agrees with the point on capability and points towards other sectors such as pharmaceuticals and auto components. “It will be a combination of penetrating new geographies and filling specific product/capability gaps,” he says. A flashback to the phase between 2005 and 2007 throws up deals like Dr. Reddy’s buying Germany’s Betapharm for $560 million, or the spate of transactions that Suzlon did that were caught in the crossfire of regulation, high valuations and also an incorrect assessment of the market. The end result was high debt and a lot of time lost. Likewise, Bharti Airtel’s buyout of Zain’s Africa business for $10.7 billion in 2010 was a complicated one and the price war later in the domestic market was a double whammy. “The acquisitions in the early 2000s were driven by the objective to be more global... The scenario has now changed given the growth opportunities in India are much superior. Hence, overseas buyouts are now more targeted and strategic in nature,” says Murugaiyan.

The tack for cross-border transactions globally was a combination of investing in a high-growth market like China or in mature markets such as Europe or the US. The Tata group made moves with acquisitions such as the buyouts of Corus and JLR. Now, the extent of opportunity back home is more attractive. If a company has a position of leadership here or a business throwing up a lot of cash with interesting growth opportunities, a buyout must complement these strengths well. Take a closer look at Tata Steel and that is fairly obvious. After the acquisitions of Bhushan Steel and Usha Martin’s steel business, it cut a cheque for Rs 12,100 crore to buy Neelachal Ispat Nigam. This was through a disinvestment and the conglomerate routed it through a subsidiary, Tata Steel Long Products. On offer was not just a million-tonne plant, which, according to Tata Steel’s MD & CEO, T.V. Narendran, had the analysts thinking that too much was being paid. “The buyout of Neelachal was not valued in terms of the capacity. Rather, we looked at the 2,500 acres, which can increase our capacity to 10 million tonnes. Besides, it came with 100 million tonnes of iron ore,” he told Business Today recently.

Amit Dalmia, Senior Managing Director of PE giant Blackstone, says India is a highly attractive destination for global capital. “India’s cost-effective manufacturing, along with a stable policy environment, improving ease of doing business, and the move to reduce dependence on Chinese manufacturing, positions it as one of the most attractive investment destinations globally. India is the best performing geography for Blackstone Private Equity globally.” 

In 2021, Blackstone invested more than $10 billion in India—$8.5 billion in private equity and $1.5 billion in real estate. To date in 2022, it has invested $1.5 billion.

The buyout of Neelachal was not valued in terms of the capacity. Rather, we looked at the 2,500 acres, which can increase our capacity to 10 million tonnes. Besides, it came with 100 million tonnes of iron ore.

T.V. Narendran
MD & CEO
Tata Steel


More control is fine

PE funds are a lot more open to control deals and Kunal Shroff, Managing Partner of ChrysCapital, thinks the approach is to be flexible. “If it is a high-quality business, we are happy with minority stakes as well as control, depending on the entrepreneur’s preference,” he says. To ICICI Securities’ Kandoi, the trend of mega deals by PE funds is predominantly in the tech sector, with eight billion-dollar deals worth $15 billion invested in 2021. Over time, PE interest in control deals, too, has increased significantly.

Vishal Nevatia,
Managing Partner,
True North

According to Vishal Nevatia, Managing Partner of True North, more than 25 per cent of deals involving PE funds are for control. “Ten years ago, it was barely 5 per cent. In a minority deal, it is important to identify the right entrepreneur, but in a control situation, a partnership with the right CEO matters,” he says. He estimates there is a base of more than 10,000 businesses that have experienced VC or PE money. “The understanding of VC/PE is a lot greater among entrepreneurs today, plus the entire ecosystem has also matured a lot both for minority and control investments.”

We create scale businesses with a strong growth pipeline and a best-in-class management team, which we exit once we have completed our business plan. It is sold to another investor, who takes the company on its next growth journey. Typically, such an investor would have a longer time frame and lower cost of capital.

Sanjiv Aggarwal
Partner for Energy Infrastructure,
Actis

That is music to the ears of those putting in the big bucks. “Control deals have picked up momentum and we see that in our deal flow as well. What has changed in the recent past is that founders are increasingly recognising that they have taken their business to a scale growing beyond which will require bringing in professional management, implementing global best practices or having a robust M&A strategy, to name a few,” explains ChrysCapital’s Shroff. The role of the PE sponsor, to him, can come as a change agent. “We can attract the right professional talent, invest in medium-term transformations and pursue an aggressive inorganic strategy.” Blackstone’s Dalmia maintains PE investors prefer controlling stakes, given that it allows them to drive the value creation agenda while ensuring best-in-class corporate governance. “Control investors, however, need to be business builders—and not just buyers of businesses—to create strong and sustainable investment returns.”

With high liquidity comes the worry on valuations. Shroff is not too comfortable on how valuations are playing out and says it is “no doubt full and investors have to tread carefully. Given the environment, we are seeing investors become more risk-off globally”. But he is quick to add that experienced managers do best in weak markets. “The ability to find mispriced assets is higher in such markets. India’s long-term story remains intact and even where global growth is slowing, India will remain the fastest growing large economy for the next few years.”  

A fund like Actis has exited two renewable energy businesses—Ostro and Sprng—by selling out to strategic investors. Sanjiv Aggarwal, Partner for Energy Infrastructure at Actis, says the exits were driven by an investment thesis of building world-class sustainable businesses and selling them for capital gains. “We create scale businesses with a strong growth pipeline and a best-in-class management team, which we exit once we have completed our business plan. It is sold to another investor, who takes the company on its next growth journey. Typically, such an investor would have a longer time frame and lower cost of capital.”

India’s cost-effective manufacturing, along with a stable policy environment, improving ease of doing business, and the move to reduce dependence on Chinese manufacturing, positions it as one of the most attractive investment destinations globally. India is the best performing geography for Blackstone Private Equity globally.

Amit Dalmia
Senior Managing Director,
Blackstone

On the specific issue of control, an approach Actis has taken, Aggarwal says, “We believe that we can create more value through this mode of investing. As builders and operators, our investment approach focusses on acquiring a majority or full control stake in the businesses we build, working with our sustainability and value creation teams to drive long-term value for our investors.”  

From this point, the M&A piece looks interesting. Balakrishnan points out that from a sector perspective, India has seen deals across the board. “In our view, one will  continue to see further activity in areas such as energy transition and renewables, technology (both enterprise and consumer tech), pharmaceuticals, consumer and industrials.” Dalmia says Blackstone has identified five focus sectors—IT, consumer, financial services, value-added manufacturing and healthcare. “Across these sectors, we believe technology transformation is key to value creation.”

With many pieces of the puzzle firmly in place, including the insatiable appetite for growth, India Inc. appears to be on a strong wicket. This round of M&As is a long story waiting to play out.

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Story: Krishna Gopalan
Producers: Arnav Das Sharma
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