Vantage Point: Why Deal Street is buzzing

Vantage Point: Why Deal Street is buzzing

The Axis-Citi, PVR-INOX and HDFC-HDFC Bank deals show it is the season of consolidation. Several factors are contributing to this trend which is only set to gather further momentum.

It is the season of mega deals. It is the season of mega deals.

It is the season of mega deals. Three big developments on the mergers & acquisitions (M&A) front over the past few days have put the spotlight firmly back on the deals space, as the Covid-19 pandemic recedes and economic activity begins bouncing back across sectors. Citi India’s retail assets were acquired by Axis Bank in a $1.6 billion transaction which was in the works for a while. This was quickly followed by a surprise deal between arch multiplex rivals PVR and INOX, as the two decided to merge to create a bigger, stronger entity after the pandemic ravaged the theatrical exhibition business over the past two years. And then there was the mother of all deals—the merger of mortgage lending giant HDFC with its banking offshoot HDFC Bank -- which would create a banking behemoth with advances of just under ₹18 lakh crore, making the merged entity the second largest bank after the State Bank of India.

The interesting thing about these three deals is that the stories behind each is different. Citi India was looking to exit the retail business as part of a global restructuring. PVR and INOX had to come together to save their businesses which had taken a major hit owing to the pandemic. And the time was ripe for HDFC and HDFC Bank to combine forces since a standalone HDFC no longer made sense in the wake of tighter regulatory supervision under the Reserve Bank of India, following the collapse of Dewan Housing Finance and others. A merger would also be beneficial as the merged entity would gain from lower cost of funds. More importantly, with Aditya Puri, the iconic HDFC Bank CEO retiring in late 2020, HDFC’s legendary chairman Deepak Parekh also above 75, and vice chairman and CEO Keki Mistry also nearing 70, it was clearly time for the long-discussed merger to finally be pushed through. 

The bigger story, however, is the frenetic activity on Deal Street.

Investment bankers tell me that the HDFC-HDFC Bank deal is expected to catalyse further consolidation among non-banking finance companies (NBFCs) which are growing bigger. This would lead them to consider consolidation, or mergers with banks, to avail of balance sheet gains. Sudhir Dash, a former Axis Banker who now runs financial advisory firm Unaprime, says the HDFC Bank deal could be a major trigger for more such mergers in the near term. But there are also several other factors at play. Private equity (PE) players and investors believe in never catching a falling knife, and they now sense the time is right for making fresh investments. The turnaround is upon us, and so the dealmakers are lining up once again to explore opportunities. A leading industrialist I spoke to, who has just completed a major acquisition, tells me he is constantly getting requests from investment bankers to discuss potential acquisitions. Investment bankers say the country’s biggest groups—which, over the past couple of years have been stitching together strategies based on buyouts—continue to hunt for bigger and bigger deals, signalling that the action on deals will continue for a while now.

One important factor is that a number of private equity investors are nearing their five- or six-year investment horizons and would be looking for exits in the companies they have invested in. With the major IPO rush now waning, and the market looking tricky, consolidation would be an option to provide exits to such investors. Manisha Girotra, CEO of investment bank Moelis, tells me that disruption is also playing its part in fuelling the consolidation boom. Whether it is the OTT challenge, which also played its part in pushing PVR and INOX to come together, or the emergence of new business models which catalysed a deal like e-pharmacy PharmEasy’s ₹4,546 crore acquisition of diagnostics firm Thyrocare, the emergence of disruptors is a key reason for the M&A activity gathering momentum. On the other hand, the frothy valuations which a number of start-ups coming to the public markets saw—leading to their stocks subsequently collapsing—are also pushing companies to opt for consolidation rather than listing. Planned IPOs are getting delayed, with several factors, from the Ukraine conflict to the soaring oil and commodity prices, leading to continued choppiness in the equity markets, leading to a growing trend towards consolidation.

What are the sectors which are likely to see heated action going forward? Investment bankers working on deals tell me the consumer sector, IT services, SaaS, pharma and healthcare will see action. Investors love consumer stories (the Vini-KKR deal some time ago is a good example), while India is seen as “partner to the world” in the area of IT services and the BPO sector. Fintech will also be another sector where deal action will become even more visible. Sectors badly hit by the pandemic—real estate, shopping malls, hotels—could also witness activity over the coming weeks and months. 

Something else has changed quite fundamentally. Investors no longer have the patience to fund businesses which are guzzling capital. They are turning to real, disruptive business models. If there is a sector with 50 companies, chances are large investors will prefer it to have 10 and push for consolidation and stronger balance sheets. The bottom line, quite literally, is that investors will now look for a clear path to profitability. A lot of consolidation and deal transactions will be driven by such concerns. While this trend was building up, the disastrous post-IPO showing by some storied start-ups has accelerated it.

Numbers bear testimony to the fact that the Deal Street buzz, which began in 2021, is gathering serious momentum. As PwC’s Deals in India: Annual review and future outlook for 2022, put out in February, has shown, 2021 witnessed a huge spike in deal activity, outperforming 2020 by 40 per cent in terms of value and 60 per cent in terms of volume. The lion’s share went to PE which contributed 57 per cent by value and 61 per cent by volume, while M&A contributed the remaining 43 per cent by value and 39 per cent by volume. If the first few months of 2022 are anything to go by, these numbers can only get better.


The author is Editor, Business Today.