As economy slows, cos will sell more assets, say bankers

Written by Baiju Kalesh | Mumbai | Updated: Jul 24 2012, 07:38am hrs
Indian companies will sell more assets than buy as they struggle to raise capital in a volatile stock market, borrow cheaper money from lenders and as cash flow shrinks in a slowing economy, pipeline of mandates with investment bankers shows.

There are three main drivers behind this emerging paradigm, says Frank Hancock, the managing director and head of corporate finance at Barclays India.

First, on the demand side, India remains a key strategic destination, alongside China, for global foreign direct investment or FDI. Large companies continue to look for the opportunity to build or buy themselves a presence.

On June 26, Coca Cola chairman and chief executive Muhtar Kent said the company will invest R28,000 crore by 2020, one sixth of its global investment to build bottling plants and supply chain.

The American company wants India to be among its top five revenue earners from seven now. In July, Swedish furniture retail chain Ikea said it would invest Rs 10,500 crore in next 15-20 years in India to build retail chains.

In general, their appetite remains unaffected by what they regard as essentially short term political and economic headwinds, says Frank, whose bank has a pipeline more of sell mandates than buy.

In 2010, Barclays, second topper in merger and acquisitions volume, executed eight mandates of which seven were buy sides with one a sell, whereas within our current pipeline, more than 90% of our mandates under execution are sell side - a complete reversal of trend. Barclays is ranked number 1 for M&A in calendar 2012, after it announced 4 transactions for $12 billion.

The special situation action among companies with shortage of capital and higher debt will trigger corporate action to consolidate and sell assets, says S Ramesh, chief executive at investment bank Kotak Mahindra Capital Company. Short to medium for next 18 months, this could be the theme. Refocus by large groups to look at core and non core will trigger more sales.

"It is true that large groups are looking at core and non core assets," says VK Bansal, chairman, investment banking at Morgan Stanley India Pvt Ltd. We could see more inbound deals in healthcare, capital goods, infrastructure and industrial sectors and outbound hunt for oil, gas, coal and iron ore assets. Steel to oil refiner Essar group has mandated Standard Chartered Bank to sell their back office company Aegis Ltd and cement to real estate developer Jaiprakash Industries have appointed Barclays to sell a part of their cement capacity.

The number of companies up for sale is growing.

"The supply of Indian companies available for sale is growing," says Hancock of Barclays, driven by promoter exits and churn within sponsor portfolios. A generation change in business families could be a trigger to exit as India gets more connectedness to the outside world which makes a impact on promoter psychology.

They, and perhaps more importantly, their heirs, are now more open than before to consider the sale of their businesses - at the 'right' price, says Hancock, adding that consolidation among mobile telephony companies could trigger sell side M&A transactions.

Early private equity investors in companies would now trigger exits primarily to a strategic or a rival.

Secondary sales are increasing as pressure builds on PEs to exit from early investments, says PR Srinivasan, managing partner at PE Exponentia. This could be a win win for both promoters and PEs as the former will receive a fresh lease of life and the latter can show returns on capital to their investors."

PEs, which had invested roughly $50b in the past decade, will have to realise around $20b fresh investments by PEs are shrinking. Private equity firms have invested $3.8 billion across 218 deals in the first half of the calendar year 2012 as against $5.5 billion across 195 deals in the same period last year, according to data provided by M&A consultancy firm Grant Thornton.