In 2012, deals fell both in value and volume terms, thanks to the ongoing euro zone crisis, slow recovery in the US, a weak rupee and a volatile stock market.
According to Grant Thornton, an assurance, tax and advisory firm, the period from January 1 to December 15, 2012 witnessed 582 M&A deals, totalling $41.5 billion, compared to 644 deals worth $44.6 billion in 2011. The 2012 figures include mergers and internal restructuring of $14.8 billion, bereft of which deal value fell as much as 39%.
At the start of the year, we were hopeful of several transactions happening, said Raja Lahiri, partner, transaction advisory, Grant Thornton. The optimism sprang from the experience in the last two years, when there was a big interest in inbound deals from Japan, the US and Europe, riding on the India growth story.
Value of inbound deals fell sharply to $7 billion compared with $29 billion in 2011 and $9 billion in 2010. The triggers (for the slowdown) were there from the first quarter, when the GDP growth slowed. The second trigger was the Vodafone tax issue, and the GAAR amendments proposed in the Budget. The issues surrounding telecom were a dampener, too.
But the year has been a landmark one for corporate India, when companies that borrowed heavily to fuel expansion came in for a reality check, bogged down by slowing cash flows and high interest rates. Mounting debt also forced some promoters to sell part of their assets. Vijay Mallya, who shut down operations of his ailing airline Kingfisher, sold 53% in United Spirits to Diageo for around $2 billion while Kishore Biyani sold a controlling stake in Pantaloon to Aditya Birla Nuvo in a R1,600-crore deal.
Deal-making lost its momentum in the middle, said Amit Khandelwal, national director and partner, transaction advisory services, Ernst & Young.
In private equity, the challenge was in the form of timely exits, he added. Exits are taking longer, and there is a mismatch in valuation, although that gap has reduced from 70% to 30% this year, said Khandelwal.
However, the second half was different. From July, the environment turned positive, since the government took the right steps towards reforms. The deferring of GAAR and formation of the Shome committee are positives, said Grant Thornton's Lahiri.
The year also saw the biggest IPO in two years, with Bharti Infratel raising over $750 million in December 2012.
The reform measures that allowed foreign investment in multi-brand retail and aviation will now spur new transactions. While retail and related sectors like real estate, logistics and warehousing will see much action, aviation will see deals from the Middle East (West Asia), which will be a source for both capital and fuel.
Many private equity players would want to monetise their assets and exit, so they become attractive targets, Lahiri added.
According to Avinash Gupta, national leader and head - financial advisory services, Deloitte, outbound deals may not come off easily. Outbound deals will be difficult, since people are not yet confident to write a cheque. Inbound deals, on the other hand, will be opportunistic. Investors will closely watch the action of the rating agencies and the outcome of the 2014 general elections. Companies that have conserved capital in the last couple of years will look to deploy it in 2013, said E&Y's Khandelwal. The investor confidence in the markets is also up, with the Sensex up 20% in 2012.
The US and Europe will remain attractive for technology, and countries in Africa, Australia and Indonesia for natural resources. The other area is media and broadcasting. There will be action in the cable distribution, driven by digitisation. In banking, ancillaries like cash management, e-payment and mobile payments are active. The last quarter has been good, with the OVL ( ON GC Videsh Limited ) deal, said Lahiri. The sentiment is slowly coming back. We expect more of inbound to happen next year. In November, OVL agreed to buy ConocoPhillips' 8.4% stake in Kazakhstan's Kashagan oilfield for around $5 billion.
The consumption story will continue to drive domestic transactions," said E&Y's Khandelwal. Overall, sectors like retail, insurance, aviation, oil and gas, and metals and mining will be attractive. There will also be consolidation in banking, given the government's reform measures. E-commerce and IT too will see action, so will the dairy sector.
But Deloitte's Gupta said getting investors in retail was not easy as the business was complex. However, domestic consumption holds promise. Companies will not look at India as an export platform."
Specialty hospitals, pathlabs, medical devices, healthcare IT, heathcare insurance providers, all these areas are of high interest, said Grant Thornton's Lahiri. Another area is of NBFCs, where PEs are putting money. When capital from banks dries up, NBFCs come into play in a big way.