The outlook on growth estimates may look promising, but India Inc does not seem to be buying in as yet. Mergers and acquisitions (M&A), the main indicator of a thriving business environment and a benchmark for business confidence, has fallen by about 18% in the nine months to September, signalling reluctance of companies to press ahead with growth plans.
While the figure is related to inbound acquisitions, within India also the situation is no less different due factors including the weak performance of core sector constituents such as steel, textiles, cement, chemicals and also due to ambiguities in law with regard to M&A where government approval is needed on an underlying asset vital for the transaction.
The volume of inbound M&A deals India for the nine months ending September 30, stood at $36.4 billion, via 907 deals, says Dealogic, a US-based financial advisory. It was $44.4 billion in the same period last year.
The largest deal happened on August 17 when MP Birla group company Birla Corp announced its $768 million acquisition of some cement businesses from Lafarge Holcim. This was the largest construction sector M&A deal in India.
In terms of sector, telecoms was the top industry for India with the targeted M&A volume in the same period totaling $11.0 billion with 13 deals. However, this tally too was down, by about 15%. IT, the other active sector saw 430 deals with total deal value of $4.2 billion.
“About three-fourths of the global economy is under stress and most economies have depreciated. Which means that for foreign companies, the value of Indian companies to buy, has become costlier compared to last year,” says Ashutosh Maheshwari, MD and CEO of Motilal Oswal Investment Advisors. “Within India, also there is lull due to the factor of ambiguity in Indian law with regard to M&A.”
Companies in the cement, steel, power sectors typically require access to raw materials which is in the form of mining leases that are allocated by the government. When ownership of a company changes hands, the ownership of these leases does not automatically change and the law is not clear whether the new owner can also use the mines. This has impacted sentiment.
Ajay Garg, managing director of investment bank Equirus Capital says that although the situation looks bad, the trend so far has been improving. “It is a tough deal environment as earnings of companies are not consistent. Sellers typically have a price in mind which may not align with that of buyer expectations. But volumes are picking up as companies are deleveraging their balance sheets and private equity (PE) investors are exiting,” he added.
In 2015, there have been large PE exits, including Blackstone selling its stake in CMS Infosystems to Barings Private Equity for $250 million. Total PE exits – initial PE investor selling to other PE firms after four to five years - so far in this calendar year have grossed $11.8 billion, higher than $11.1 billion in the entire 2014.
Then there are also instances of companies selling part of their assets to raise funds to meet debt repayments. Some examples include Lanco selling its Udupi power plant to Adani Power for Rs 6,300 crore and Hotel Leelaventure selling its Goa property to a Malaysian company for Rs 725 crore.