Indian M&A march slows, but hope abounds
The Indian juggernaut that spent the past few years hurtling down the global M&A street has changed gear and is decelerating, resulting in a slowdown in related capital market activity, particularly syndicated loans. The increased cost of funding as a result of the global credit crisis might have created a deterrent for M&A activity, but Indian acquirers nonetheless remain in discussions on potential M&A opportunities.
Loan markets have been the biggest beneficiaries of India Inc’s push overseas to acquire assets. Almost every acquirer, including risk-averse companies such as IT bellwether Wipro, borrowed in the loan markets last year to fund their overseas forays, leading to record volumes of around US$41.84bn in loans from India in 2007, according to Thomson Reuters data.
Although year-to-date loan volumes stand at nearly US$22bn, there have been only a small number of acquisition financings, which is in stark contrast to last year, when most transactions were M&A-related financings.
“Overall, the global macroeconomic environment is quite challenging, which obviously slows down the pace of M&A activity. However, Indian companies continue to explore offshore M&A opportunities. Compared with the US$77bn in India M&A deals (including private equity) for 2007, the first half of 2008 has seen this number at US$36bn,” said Kalpesh Kikani, global head of investment banking at ICICI Bank, which has been an active arranger of M&A related financings.
“India Inc’s aspirations have not diminished. Companies continue to be acquisitive and are evaluating outbound opportunities,” said Sameer Nath, head of M&A at Citi in Mumbai. “Fundamentals of Indian companies are quite solid and M&A activity remains relatively robust as was evidenced by the recent acquisitions by Infosys and ONGC Videsh.”
“The biggest strength Indian companies have is their ability to turn around distressed assets,” said Brijesh Mehra, country corporate and investment bank head for India at ABN AMRO. “The acquisitions by Tata Steel and Hindalco Industries have lifted the ambitions of corporate India, which is increasingly thinking on global terms. The global credit crisis has reduced their appetite somewhat and big-ticket acquisitions will be few and far between.”
Indeed had the merger between South Africa’s MTN Group been consummated between either Bharti Airtel or Reliance Communications (RComm), it would have marked a bumper year not just for Indian M&A, but also loan volumes. Bharti’s merger with MTN would have led to a US$42bn-$45bn deal with a loan of around US$21bn backing it. RComm’s merger with MTN would have been for the same size, but would have led to smaller loan transactions as these would have involved refinancing of RComm’s existing debts.
The merger of MTN with Bharti or RComm would have created a giant telco but, more importantly, it would have transformed the Indian company into a truly multinational company with operations in nearly two dozen countries. What is more, the change in identity would have given the Indian telco the platform to expand further into other markets if the need arose.
Although the merger did not go through, it underlined the need for an offshore platform that will enable acquisitive Indian companies to pursue global expansion. Although Indian capital markets have grown in size, they still are not considered deep enough to support Indian Inc’s M&A drive. Many feel the way forward for Indian companies is to have an offshore subsidiary that is listed in London or elsewhere so that it provides them better access to capital.
A precedent in this regard has already been set by Vedanta Resources, which listed on the London Stock Exchange in December 2003. Vedanta owns controlling stakes in Mumbai-listed Sterlite Industries and Madras Aluminium Company (Malco), which also gives it control of Bharat Aluminium and Hindustan Zinc.
Since listing on the LSE, Vedanta has provided numerous capital markets opportunities to bankers through equity, bond and loan financings. In August 2008, it completed a US$1bn 4.75-year loan that refinanced a US$1.1bn one-year bridge signed in April 2007. The bridge was an offshore loan that funded the US$1.5bn–$1.6bn acquisition of a 71% stake in Sesa Goa, India’s biggest non-state iron-ore exporter.
“Being listed on the New York or London Stock Exchanges definitely expands the company’s reach to a wider investor community and has a connotation for global banks (maybe 150 such banks), while being listed only on the domestic stock exchange may have the same connotation for fewer number of banks (may be 25 such banks),” said Kikani, stressing the importance of access to foreign capital.
Vedanta’s case definitely strengthens the argument. An offshore entity has easier access to foreign capital markets and will not be subject to the regulatory restrictions imposed on Indian-listed or incorporated companies. Indeed, had Vedanta completed the acquisition through an Indian entity, it would not have been able to tap offshore financing to complete a domestic acquisition as per Indian regulations.
The most likely candidate to follow in Vedanta’s footsteps is the Tata Group, which has been the torchbearer for India Inc in its overseas drive. Speculation has been rife for a while that Tata Steel Global Holdings, a Singapore-incorporated company in the group that has been the vehicle for its overseas acquisitions, is eyeing a London listing. Such a move would help bring together Tata Steel’s non-India assets in mining and steel making and also unlock the value inherent in those assets.
Another company that has already taken significant strides in achieving an offshore presence is Ballarpur Industries (Bilt), which last year acquired Malaysia's Sabah Forest Industries (SFI) for US$261m and funded it with a US$200m leveraged buyout (LBO) and capex loan signed in June 2007.
Bilt is now in the loan markets with a US$560m financing, which Citi is arranging, that will refinance the June 2007 loan. Prior to embarking on the new financing, Bilt completed a corporate reorganisation in March this year that saw India’s largest papermaker injecting three of its six manufacturing plants in India into its subsidiary BILT Graphic Paper Products (BGGPL) for Rs19.5bn (US$446m) in cash.
Subsequently, a Netherlands-incorporated subsidiary called Ballarpur Paper Holdings (BPH), which also owned a 97.8% stake in Malaysia’s SFI, acquired BGGPL for Rs19.5bn. Bilt used around Rs10bn of the proceeds to pay down its debts and spent the remainder on a share buyback.
Meanwhile, BPH sold a circa 21% stake in itself to Government of Singapore Investment Corp and JPMorgan Special Situations Asia (the private-equity arm of JPMorgan) for US$175m.
Prior to the sale, BPH was a wholly owned subsidiary of Ballarpur International Holdings (BIH), another Netherlands subsidiary owned 80% by Bilt and 20% by JPMorgan SSAC. Following the reorganisation and stake sales, Bilt owns 100% of BIH, while JPMorgan SSAC’s 20% stake converts into a 4%–4.5% stake in BPH. (See Graph.)
Proceeds raised from the stake sale in BPH along with the around US$310m from the US$560m loan being arranged by Citi will go towards the consideration payable for the acquisition of BGGPL.
The whole exercise was driven by the fact that Mumbai-listed Bilt’s share price did not reflect the true value of the combined entity. It has now enabled Bilt to unlock value in its Indian assets, pay down higher cost rupee debts and also internationalise its business. By doing so Bilt now has an offshore funding vehicle in BPH that has better access to international capital markets than Bilt itself.
Indian companies can take a leaf from Bilt’s book. It is surprising why they have not followed in Vedanta and Bilt’s footsteps. One of the primary reasons, and unlike Bilt’s case, has been the valuations they have enjoyed at home.
“Indian promoters are not excited about offshore equity listing, especially when they have been enjoying better valuations at home until recently,” said Kikani.
“If there is a valuation disconnect such that offshore markets are more favourable on a sustained basis, Indian promoters will explore such options. The valuation disconnect may well be sector or company-specific as average ADR premiums have been declining over the last few years,” said Nath.
“Listing of offshore vehicles has not yet become a trend, but the process will evolve and it cannot be denied that Indian companies will benefit tremendously from better access to offshore capital,” added Vikas Khattar, director, capital markets origination at Citi. “In competitive M&A situations, Indian companies have had the advantage of a strong balance sheet. If you complement it with a platform that has the flexibility to raise capital more effectively, it will be a winning combination.”