Investors don’t buy big deals any more

Investors don’t buy big deals any more
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First Published: Wed, Feb 17 2010. 11 38 PM IST

Updated: Wed, Feb 17 2010. 11 38 PM IST
Mumbai: Investors cheered the increasing possibility of Reliance Industries Ltd’s (RIL) bid to acquire Dutch company LyondellBasell Industries AF failing. Reinforcing a growing trend among shareholders sceptical about big-ticket cross-border buys, they drove up the share price of India’s most valuable company by 1.4% on Wednesday.
In what still remains a recent phenomenon in India, investors have started buying stocks when the buyout bids fail; conversely, a company that makes a successful cross-border buy often sees its stock head south. That presents a sharp contrast to the period between 2004 and 2007 when buzz of a possible large or midsize acquisition, even an unnamed one, was enough to send stocks into orbit.
“It’s a case of once bitten, twice shy,” said Dara Kalyaniwala, vice-president of investment banking at Prabhudas Lilladher Pvt. Ltd. “Investors have seen that not all past mergers and acquisitions (M&As) have done well.”
In a late evening announcement on Tuesday, Lyondell said it had reached a settlement with its “unsecured creditors”—the principal group that was supporting and pitching for RIL’s “preliminary, non-binding” bid, in the hope that this would ensure they got at least some of their money back—for $450 million (Rs2,070 crore today), forking out a 50% higher sum than offered earlier.
RIL’s shares rose 1.44% on the Bombay Stock Exchange to close at Rs1,032 each on Wednesday, a day after the event. The exchange’s bellwether index Sensex rose 1.25% to 16,428.91 points.
Goldman Sachs’ sector analysts Nilesh Banerjee and Nishant Baranwal, who “believe RIL’s chances of acquiring LB (Lyondell) have diminished following this agreement”, said in a note to clients on Wednesday: “While we think the LB acquisition does have strategic merit for RIL, we believe the bid not going through would be a better outcome than RIL getting drawn into a bidding war and eventually over-paying for the assets.”
The same sentiment is echoed by most of their peers. “RIL will have to significantly raise the valuation and that doesn’t seem likely. It was a good deal at $12-13 billion, beyond that status quo (not adding the asset) is better,” said another analyst at a foreign brokerage who did not want to be identified.
“Investors probably see Reliance not buying Lyondell as a positive,” said Vikas Pershad, Chicago-based chief executive at hedge fund Veda Investments Llc. “They probably want to see them putting all this money into oil-producing assets.”
An RIL spokesman declined comment on whether the conglomerate remains interested in the target or the latest development implies the RIL bid will be ignored by Lyondell’s management, which has consistently preferred its own reorganization plan over every other alternative.
Speaking to Mint late night on Tuesday, Lyondell’s key spokesman David Harpole said the path was clear for the firm to emerge from its Chapter 11 bankruptcy filing after the latest settlement.
On being asked about the continuing relevance of RIL’s bid, he said: “Any competing, alternative plan will have to be a definitively higher and better offer that maximizes the value for our creditors.”
While RIL has never confirmed its valuation estimates for Lyondell, it had reportedly raised it to $13.5 billion from $12 billion a few weeks ago, but failed to woo the existing Lyondell management. “It seems like Reliance is effectively out of the race for now,” Deepak Pareek, an oil and gas analyst at Angel Broking Ltd said.
Analysts, however, are convinced there will be more buyout action from RIL as it tries to deploy the cash pile it is sitting on and will generate in the future. Banerjee and Baranwal of Goldman Sachs, in their note, call this likely since there are “no major projects lined up to consume excess cash (after committed capex) of $25 billion that RIL will likely generate between FY11E-14E”.
Indian M&As
The rise in RIL’s stock on Wednesday is not the only example of increasing investor scepticism on cross-border deals. After Bharti Airtel Ltd announced its bid for the African telecom assets of the Zain group on Sunday, investors hammered the scrip for two straight days.
Bharti’s share price slid 9.22% on Monday and 4.45% on Tuesday, before pulling back 2.44% on the third day after the company sought to quell doubts surrounding its $10.7 billion valuation for the target.
According to Bloomberg data, between 2005 and 2009 Indian companies went on an acquisition spree, spending $61.3 billion on 631 overseas buys. For much of the 2004-07 bull run, the stock markets played cheerleader to the M&A plans of the companies.
For example, the scrip of Dr Reddy’s Laboratories Ltd rose 37% in the three months to the final signing of its deal to acquire German firm Betapharma Arzneimittel GmbH in February 2006.
Similarly, shares of Suzlon Energy Ltd gained 20% ahead of its deal to buy a stake in REpower Systems AG in early 2007.
“Everyone was excited those days on foreign acquisitions,” said C.G. Srividya, partner and specialist (advisory services) in consultancy firm Grant Thornton India. “Even if they were completely debt-funded, and were not long-term value accretive, share prices significantly shot up.” But with the economic environment changing and stock market turning volatile, shareholders have become more sceptical.
Nor are people willing to blindly believe all foreign M&As are good. For instance, Dr Reddy’s had to write off a notional Rs1,400 crore on account of Betapharma last fiscal. Similarly, Hindalco Industries Ltd had to write off some Rs7,000 crore on account of its buy of Novelis AG.
To be sure, the trend need not apply to all companies. To give just one example, while Bharti Airtel’s shares had risen by 4% soon after its talks with South Africa’s MTN Group Ltd were called off, the relief rally was short-lived after investors woke up to the reality that there was no near-term triggers for a price rise and that, in the long-term, an overseas acquisition was just what the telco needed.
bhuma.s@livemint.com
Ashwin Ramarathinam of Mint, Reuters and Bloomberg contributed to this story.
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First Published: Wed, Feb 17 2010. 11 38 PM IST