Growing competition, sluggish growth driving consolidation across sectors
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Mumbai: Idea Cellular Ltd and Vodafone India Ltd’s plans to merge their businesses, excluding Vodafone’s 42% stake in Indus Towers Ltd, to create India’s largest telecom company with a total revenue of over Rs80,000 crore highlights the growing trend of consolidation across a wide range of sectors. The wave of consolidation drove merger and acquisition (M&A) activity to a record high of $69.75 billion in 2016, according to Thomson Reuters.
The mega merger of the two telecom giants follows large transactions such as the merger of Max Life and HDFC Life Insurance, the coming together of Reliance Communications Ltd and Aircel Ltd and the sale of Essar Oil Ltd to Russian oil major Rosneft OAO.
Besides capex-heavy sectors, there is also a potential deal brewing in the banking space as Kotak Mahindra Bank and Axis Bank are rumoured to be exploring a merger.
High competition, slower growth in certain markets, and stress on corporate balance sheets are some of the major factors that are driving the strong trend of domestic consolidation.
According to M&A experts, consolidation has almost become a necessity in certain sectors such as telecom given the hyper-competitive environment there.
“In telecom especially, consolidation is more of a need of the day. If you look at what Reliance (Industries Ltd) has done to the market, it was unprecedented. Indian customers are price sensitive. So, primarily from a price competition perspective, the ability to withstand this kind of strong competition and a disruptive model such as Reliance will make other players seek consolidation,” said Rajesh Begur, founder and managing partner of law firm ARA Law.
Lack of growth opportunities and the large quantum of investments required in a slow-growth environment are also pushing promoters to seek consolidation to enhance their market position.
“The overall expected future growth in a sector and the capital needs to achieve the said growth are key factors causing consolidation in mature sectors,” said Sanjeev Krishan, partner and leader (private equity and deals), PwC India.
Distressed corporate balance sheets, too, drive consolidation.
“While it is a high-growth economy, there is no denying that there is a lot of distress in the balance sheets, whether it is power, roads or passive infrastructure such as telecom towers. Excessive leverage has created opportunity for consolidation,” said Pramod Kumar, Barclays India managing director and co-head of banking.
Debt-related issues have seen the likes of Jaypee Group sell around assets with a cement-producing capacity of 21.1 million tonnes to UltraTech Cement Ltd for over Rs16,000 crore, and Avantha Group to sell its stake in Crompton Greaves’s consumer products business to private equity firms Temasek and Advent International.
Corporates are also rationalizing their businesses and prioritizing certain businesses over others, which is also driving divestments and consolidation, added Kumar.
According to experts, the consolidation drive is also being aided by the fact that promoters today are lot more comfortable giving up control of businesses.
“Over the last three to five years, we are seeing that promoters are becoming less emotionally attached to their businesses. You have seen far more divestments happening. Traditionally, the second generation would pick up business from the first generation, but that is not happening as much as it used to,” Begur added.
In terms of sector-specific action, according to experts, capex-heavy sectors such as infrastructure and industrials will see a stronger wave of consolidation than other sectors. Financial services, too, will see strong consolidation, they add.