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Note ban seen hurting consumer, retail deals

Investors likely to wait and watch demonetization impact on revenue, valuation


Private equity and M&A deal value dropped to $608 million in 2016 from $4 billion in 2014 and $2 billion in 2015. Photo: Mint
Private equity and M&A deal value dropped to $608 million in 2016 from $4 billion in 2014 and $2 billion in 2015. Photo: Mint

Mumbai: The government’s move to withdraw high-value currency notes is expected to hit mergers and acquisitions (M&A), particularly in consumer and retail sectors, over the next six to 12 months, according to investment bankers and analysts.

The sectors have already reported a steep fall in such transactions. Private equity (PE) and M&A deal value dropped to $608 million in 2016 from $4 billion in 2014 and $2 billion in 2015.

“In the short term, there is a 30%-50% drop in revenue in the affected months (November and December), especially in discretionary spending as well as seasonal categories. This has impacted not only cash sales but also digital transactions because of the short-term uncertainty and resulting sentiments,” said Samir Bahl, chief executive officer (investment banking), Anand Rathi Advisors Pvt. Ltd. “From an investors’ perspective, there are a few who have chosen to wait over the short term to fully understand the impact of demonetization on revenues and valuation.”

Discussions on deals between several regional consumer brands and PE or strategic investors have been stuck for the last 6-12 months.

“Some investors are being cautious and adopting a wait- and-watch approach until they get a better sense of the longer -term impact of demonetization. Sales have dropped for a number of consumer players and their caution is understandable,” said Siddharth Bafna, partner and head of corporate finance at Lodha and Co., a Mumbai-based boutique investment bank.

The Sequoia Capital-backed Prataap Snacks Pvt. Ltd, which sells snacks under the brand Yellow Diamond, filed its share sale documents with the market regulator in October, after failing to raise funds from PE firms. The Indore-based snacks maker had been looking since March last year to raise around $50-$70 million from private equity investors to fund its expansion plans and provide an exit to Sequoia, Mint reported in April.

The owners of Sesa Hair Oil, a popular haircare brand owned by Gujarat-based Ban Labs (P) Ltd, could not find a buyer for the past year, though discussions were held with consumer goods companies including Marico Ltd, Bajaj Corp. Ltd and Wipro Ltd’s consumer goods arm Wipro Consumer Care and Lighting, said Mint reported in May.

A couple of consumer durables makers are also in discussions to unlock value by selling part of business to PE funds.

Surya Roshni Ltd, the Delhi-based make of consumer durables, has been in talks for the past 6-8 months to sell its lighting business, The Times of India reported on 31 August. PE funds Warburg Pincus Llc and Bain Capital Lp have expressed interest in the business.

Several large buyout funds have backed out from discussions citing a valuation mismatch, according to a PE fund manager who engaged in initial discussions and backed out later.

The Delhi-based consumer durables maker Lloyd Electric & Engineering Ltd has also initiated the process of carving out its fast-growing consumer durables segment and inducting a strategic or PE investor and unlocking value, The Economic Times reported in September.

Moshe’s Fine Foods Pvt. Ltd, the New Silk Route Partners Llc (NSR)-backed restaurant chain under the brand name Cafe Moshe’s, has been up for sale for the past year and is yet to find a buyer. NSR held a 58% stake in Moshe’s as on 31 March 2015.

Between 2013 and 2015, the consumer goods sector saw several large transactions. In June 2015, Emami acquired Kesh King from Himachal Pradesh-based SBS Biotech Pvt. Ltd for Rs1,651 crore. In December than year, Hindustan Unilever acquired Kerala-based hair oil brand Indulekha for Rs330 crore.

But no such large transactions happened in 2016.

M&A deals worth $3.6 billion took place in 2013 and 2014; the amount dropped to $1.7 billion in 2015. In 2016, deals worth a mere $286 million were struck in the consumer retail sector, according to data from global advisory firm Grant Thornton Llp. PE deals also fell to $321 million in 2016 from $453 million in 2015 and $694 million in 2014.

“PE monies seem to have been diverted towards e-commerce/start-ups, and inbound investment seems to have been on hold due to the lack of scalability demonstrated by FMCG companies,” said Prashant Mehra, partner, Grant Thornton in India.

At the regional level, consumer goods sales declined in the aftermath of demonetization.

“Given the good monsoon this year, rural sales had begun picking up post harvest from October onwards. This has, however, been significantly impacted in the last few weeks due to demonetization,” Vivek Gambhir, managing director, Godrej Consumer Products Ltd, said in a PTI report dated 11 December.

The situation should normalize from the last quarter of FY17 as the liquidity crunch eases, Gambhir said.

Investment bankers believe the situation will improve in the long-term.

“Over the long-term, we see limited impact on deal processes as buyers understand that this disruption is short-term and impact of moving to a digital economy has very positive long-term implications for India’s consumption story,” said Bahl of Anand Rathi Advisors.

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