Mumbai: It may still be early days for buyouts in India, but 3i Group Plc., the global private equity fund that has £9.79 billion (around Rs78,614 crore) under management, has begun to look for acquisitions. In a buyout, a private equity firm acquires an entire company or a controlling stake in it.
Saurabh Shah, who co-headed 3i India Pvt. Ltd’s growth capital division along with Mahesh Chhabria, has been chosen to head buyouts for the local unit. Growth capital involves private equity firms providing companies with funds in exchange for a minority stake in them. “We’re not expecting to do 10 buyouts (in India) a year,” says Shah, matter-of-factly. He will draw out of the 3i’s $8 billion (Rs35,000 crore) Euro V Fund (a global fund) for local investments.
3i India will look at buyouts in the $1 billion bracket, but may initially do smaller deals, Shah says.
While admitting that the majority of domestic promoters are still averse to divesting stakes in favour of an outside entity, Shah says there are three reasons why buyouts could pick up in India.
Click here for the top private equity deals in India since 2003
One, large conglomerates may look at spinning out businesses that are not on top of their priority list. “If a conglomerate wants to keep its best business, it may decide to hive off its No. 9 or No. 10 business,” says Shah.
Two, where succession planning becomes difficult, the company may be better served by selling out to investors who can bring in the right mix of professional management to achieve the company’s longer term objectives.
And three, in a service sector-dominated economy such as India, it will be the professional managers that a financial investor (read private equity) brings in, that will lead to greater wealth creation.
Buyouts in the country have so far been few and far between. In late 2004, General Atlantic Partners Llc. and Oak Hill Capital Partners each acquired 30% of business process outsourcing provider Gecis, a unit of General Electric Co., for $500 million.
An affiliate of Kohlberg Kravis Roberts and Co. bought 76% of the software development and solutions business of Flextronics International Ltd for $684 million. ICICI Venture’s buyout of publishing company Infomedia India Ltd and Blackstone Group’s of business process outsourcing firm Intelenet Global Services Pvt. Ltd are other examples.
Carlyle Group, which set up its buyout team in June 2005, has completed just one deal in the country. This was a 5.6% acquisition in home finance company Housing Development and Finance Corp., or HDFC, in July 2007 for $650 million. Though it was a sizeable deal, it was not a buyout because the stake was so small.
3i’s buyout team could encounter competition from strategic investors, and Shah says it already has. Just as the promoters of Ranbaxy Laboratories Ltd sold their stake to Japanese pharmaceuticals company Daiichi Sankyo Co. Ltd for between $3.4 billion and $4.6 billion, other promoters, too, may prefer to sell to strategic rather than financial investors.
“We have explored four deals so far. Two have been lost to strategic investors, and in the other two, the deal itself has not taken place,” he said.
But on the advantage of a financial investor, Shah says: “A financial investor is not going to ask for quarter-on-quarter performance, unlike a strategic investor. A financial investor will typically come with a four-year view, giving the company a more stable shareholder base.”
Besides, adds Shah, “by selling to a financial investor and keeping a minority stake, a promoter can continue to enjoy the benefits of an upside in the company, and at the same time ensure that his people are looked after well by the new management.”
3i India has invested $350-400 million in 10 companies from its growth capital division. These include Welspun Gujarat Stahl Rohren Ltd, Nimbus Communications, Mundra Port and Special Economic Zone Ltd, OOH Media and Vijai Electricals Ltd. From a $1.2 billion India-dedicated infrastructure fund, it has invested in Soma Enterprises Ltd and Adani Power Ltd.