Mumbai: India’s Insolvency and Bankruptcy Code (IBC) has intensified activity in distressed merger and acquisitions (M&As) in India with deals worth $14.3 billion completed in the past two years, said corporate investigations and risk consulting firm Kroll.

Distressed M&A activity comprised a significant 12% of total M&A value, led by deals involving Bhushan Steel ($7.4 billion), Reliance Communications ($3.7 billion) and Fortis Healthcare ($1.2 billion). Close to $10 billion of these deals have been closed in 2018 alone, according to Kroll Spotlight Asia report.

“The market is only going to get interesting. We have seen a 12% distressed M&A deal value in a year where M&A in India itself is going to be the highest ever," said Tarun Bhatia, managing director at Kroll.

“Initially, there was concern that the IBC would lack firepower; however, while there have been some hits and misses, on the whole, the IBC has been very much a positive for the Indian market and is opening the door to a new investment class: distressed assets," said Bhatia.

Over the last two years, the IBC has created a formal market for distressed debt in India, Bhatia said adding the IBC has resulted in a change in mindset as against earlier when investors felt getting involved in distressed M&As in the country was time consuming.

However, in terms of the number of deals closed, distressed M&A has accounted for a nominal 3% of total M&A volume in the Indian market at only 21 out of a total 623 deals completed since 2017, the report said.

Bhatia said deal volume should increase as more cases get referred for resolution under the IBC.

“Definitely, the activity will grow in terms of proportion as well as in absolute. We have seen the big cases go through and the next ones may not have the same deal value, but the deal count will go up going ahead," he said.

In addition to the more than 900 companies admitted into the National Company Law Tribunal (NCLT), an additional 600-1,000 are expected to join the list over the next 12-18 months, creating a large pipeline of acquisition opportunities in the months and year ahead, the report said.

In terms of buyers, the M&A activity so far has been led mostly by domestic deal makers with Indian investors comprising 90% of distressed deal value and 81% of deal volume.

On the foreign buyer side, Malaysia-based IHH Healthcare’s acquisition of Fortis and Wilmar International’s deal to buy Shree Renuka Sugars have been the notable transactions.

According to Bhatia, the early wave of deal making was expected to be led by domestic strategics, given the kind of sectors such as steel, which formed a major chunk of the initial cases referred to IBC.

“We were clear that the first set will have a big strategic play. It is not that financial investors have not looked at it but their ability to compete on pricing with the strategics on these big cases is limited. In sectors such as steel, there is lot of uncertainty around completion timelines for greenfield projects and so there was strong interest from domestic strategics to acquire these existing distressed steel assets," said Bhatia.

Kroll expects financial investor activity to increase. “Financial investors are doing their testing and smelling the opportunities and soon you will see those investments happen. For some of the big deals, the strategics may need financial investors or vice-versa, because not every strategic may have the same deep pockets and you would not want to invest all your money into one investment and compromise on growth elsewhere," said Bhatia.

While there are takers for bigger ticket sizes, smaller ticket-size deals will have more interest from financial investors, he said.

“However, for financial investors, the ability to generate return over the value they pay will always be a key variable, while for a strategic it plays into many other things such as keeping competition away, achieving scale, etc.," added Bhatia.

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