Mumbai: Merger and acquisition (M&A) activity in India rose to a record $69.75 billion across 1,195 transactions in 2016, fuelled by a wave of consolidation across sectors. Consolidation as a driver for M&A activity is expected to continue in the near- to mid-term as available dry powder, both foreign and domestic, steadily accumulates. Barclays Capital was at the forefront of some of the largest deals in India last year.
In an interview, Pramod Kumar, Barclays India managing director and co-head of banking, talks about the various factors that are likely to drive M&A deals in the coming quarters. Edited excerpts:
Going ahead, what are the trends you are observing that will drive M&A activity in India?
I think what we will see, and what has been evident from the activity in the past year as well, is the continued consolidation and rationalization of businesses. This will lead to some of the existing players selling off parts of their businesses or monetizing them at attractive valuations. We will see that accentuated in a large way by strong private equity interest in these businesses and the willingness and ability (of private equity funds) to own these businesses with large stakes.
These are businesses which are fundamentally not bad, but which have been either under-invested in or haven’t got the attention they deserve and can show significant improvement. There are several instances of that if you look back at the past 12-24 months.
For example, Crompton Greaves’s consumer business falling out of leverage issues that the group was facing. We have seen several other industrial assets being divested, a lot of cement assets get sold, primarily a result of leverage issues that the owners have faced.
More corporates are taking a view around rationalization of their businesses. All that has led to M&A activity.
What is the level of interest you are seeing from strategics, especially foreign strategics?
Surprisingly, in all of this, we may not have seen a large amount of foreign strategic action yet, with the exception of a few such as American Towers, Yokohama and Fosun. This is something that will change going forward. I am hoping that you will see more interest from them, and that would be primarily on account of them becoming more and more comfortable about India. It has certainly improved from what you saw say two years ago or going back to the previous government’s last two years. But I think more can happen.
Any particular sectors where strategic interest is higher?
There is interest in financial services, there is interest in renewables, interest in some areas of industrials; even in health-care services, we are seeing some conversations.
In private equity, the general feeling is that the interest is more around buyouts. How do you think PE activity will pan out this year?
Private equity feels more comfortable, and increasingly so now, of being able to own the business and then control it, change management, bring about improvements, etc., which wasn’t the case a few years ago.
In a way, they have also felt that owning a minority stake in an environment where there is no huge earnings growth, their ability to really do much with the business is limited and I would say that in many situations a lack of trust factor is also playing. Some of the experiences of private equity with the existing promoters hasn’t really been great, so they would prefer to have a larger stake and then the ability to bring about improvement where they can.
What impact will some of the geopolitical situations such as Trump coming to power in US and all the noise around changes in policies for sectors like IT and pharma, have on deal making in these sectors?
For pharma, the US is still the largest market. Several Indian firms will continue to look to consolidate their positions in the US. So I don’t rule out activity on that front, though it may be a little more cautious around what policy changes the Trump government implements. There will be some bit of caution.
As far as M&A is concerned, tech companies were not doing very big acquisitions. Pharma in the US will be more cautious until they get clarity around the policies.
We saw several overseas bond issuances and refinancing activity last year. How is that market looking like in 2017?
The markets are quite liquid. Everyone’s counting on two rate hikes this year in the US. So, people are certainly taking advantage of the high amount of liquidity that is there in the market and that the credit spreads have compressed. People do see this as an opportunity where they can refinance their existing debt and term out the maturity.
Interestingly, we also have some other companies which are looking to access the bond market to replace their rupee funding—we have seen Renew Power do such a bond and earlier Greenko had done that.
The driver there is again strong liquidity in the market, ability to get good pricing, coupled with the fact there is a huge growth opportunity here in the renewables space, and that this frees up their bank lines, allowing them to go and borrow incrementally from the banks to grow their portfolio.