India comes of age in M&A, but not always smooth

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Mumbai, May 9: : Bharti Airtel's overtures towards South African telco MTN Group, which could lead to India's biggest foreign takeover, are a sign that big Indian firms are hungry for deals and undaunted by a global credit crisis that has dented M&A activity around the world.

While Bharti shares have been hit as analysts query the mobile firm's ability to fund a deal that could top $20 billion, few doubt there will be more acquisitions by increasingly outward-looking Indian firms.

"Indian corporates have come of age," said Pramit Jhaveri, head of investment banking at Citi India, which advised Tata Motors on its $2.3 billion buy of Ford Motor's Jaguar and Land Rover brands in March.

"Some of these headline-grabbing transactions would have been unimaginable just a few years ago," he said, noting they have become possible because of strong balance sheets from profitable growth, good management teams and easy access to capital.

"Local bank liquidity remains strong, and the local and global capital markets have embraced well thought-out and well structured transactions from India," he said.

Global M&A volume is down by nearly a third this year, according to Thomson Reuters data, and even Indian outbound M&A has dropped 38 percent, but there have been three $1 billion-plus deals, including the Tata Motors acquisition.

"Maybe because M&A is cooling off elsewhere, bankers are telling Indian companies this is a good time to look at acquisition opportunities," said S. Subramanian, head of investment banking at Enam Securities.

Indian firms do not have to compete as much with Western rivals and private equity firms for assets now, he said, adding they have de-leveraged in the last couple of years. "They've become larger, too, so they know how to run big businesses."

But it will not be an easy ride.

Tata Steel has struggled to raise funds through a mixture of equity and debt for its $13 billion 2007 acquisition of Anglo-Dutch steelmaker Corus Plc, India's biggest foreign takeover to date, and Tata Motors' $3 billion bridge loan for the Ford deal has not been smooth. Other companies have had trouble raising money from rights issues in a turbulent stock market that is down more than 15 percent this year, while the cost of borrowing overseas has risen by 200-300 basis points over a year.

"It's more expensive to raise money today than it was a year ago, but on the flip side, valuations of target companies also have corrected," Subramanian said.

"Plus, Indian companies have generally tended to be conservative, as the founders still hold a significant stake. Any decline in share prices will affect them, so they tend not to overpay for an asset," he said.

Once fiercely possessive about their holdings and control of their companies, the current environment is forcing Indian companies to consider alternative sources of capital which may include a stake dilution and/or management participation.

Vehicle maker Mahindra & Mahindra for the first time teamed up with a buyout firm, Apollo Partners, to bid for Jaguar and Land Rover, and recently concluded the acquisition of an Italian gear maker with private equity firm ICICI Ventures.

It is also raising about $170 million from a private placement with a Goldman Sachs unit that will give the US investment bank a 3.7 percent holding in Mahindra.

"The credit crunch is squeezing small and mid-sized firms, but it is throwing up new opportunities for larger companies like us," Vice Chairman Anand Mahindra told Reuters recently.

"We are also discovering new sources of capital, and private equity brings management expertise and networks. So these are definitely going to be options for us going forward."

But analysts caution against rushing head-long into an acquisition spree simply because there are assets to be had, at a time when growing competition, high inflation, rising commodity costs and softer demand are pressuring margins.

"Clearly, if (Bharti's Sunil) Mittal wants to play in the big league, he has to do a big deal," said Rishi Sahay, director of IndusView Advisors.

"But it's not just about having the money to pull it off. Everyone wants to do a Tata-type deal and plant a flag in an overseas market, without considering if they have the experience and management expertise for it," he said.