Mumbai: London-based Rothschild and Co. has been at the forefront of some of the largest cross-border merger and acquisition (M&A), restructuring and capital advisory deals across the globe.
Last year alone, the 200-year-old investment bank advised clients in more than 230 transactions ranging from financial services to renewable energy.
In an interview, Amitabh Malhotra and Chandresh Ruparel, co-head and managing director of Rothschild India, discuss factors driving M&A and private equity in the current economic environment.
How is the outbound M&A environment looking?
Malhotra: State-owned companies, especially in oil and gas, are looking at assets overseas.
Pharma companies are also on the lookout for opportunities, but in a far selective manner that helps companies to diversify and de-risk themselves. For example, if a company is over-invested in US, it is looking to mitigate market exposure risk.
Also, it is about the size and fit of the potential acquisition targets that is driving M&A strategy in pharma sector.
Large deals are far and few, while smaller transactions are becoming common.
Has the rally in the listed equity markets made M&A deals tougher to execute in the unlisted space?
Malhotra: India seems to be at the spot where international investors want to put their money. Also, post demonetisation, current interest rate regime avenues for domestic savings to be deployed have become limited.
It has resulted in listed market being surfeit with equity and the current valuations reflect that. The public markets have emerged as competitors to private equity and strategic investments.
But today, you can safely say that the Indian M&A space is becoming more mature where companies are preparing for a parallel track or dual track as you call it, where you look at all your options and decide at a particular point to flip it towards the public market or otherwise.
But are you seeing enough strategic interest?
Ruparel: There is interest but the change is reflected in the way investment banks are running transactions.
You don’t reach out to every potential target, which was the norm a few years ago.
Discussions are currently limited to a closed group driven by strong rationale as to why conversations should begin in the first place. It is not exactly euphoria.
If you have two committed parties in potential M&A transactions, I think it’s a great outcome.
You may still sign a non-disclosure agreement (NDA) and circulate investment memorandums with few, but in a strategic process, we are seeing interest that would not extend beyond two parties.
Is the present regulatory environment conducive to complex M&A deals?
Malhotra: We advise our clients to “keep it simple" and tell them to be mindful of any situation when there is a process requiring regulatory approval because it takes its own time.
Regulators are always keen to understand what is going on behind the scenes. So, if you keep everything out in the open and keep it simple, then the approval is there for you to take.
There has been a lot of talk of foreign capital buying into distressed assets in India, but we are yet to see deals take place. What could be the reasons for this?
Ruparel: Before the Insolvency and Bankruptcy Code, there was a lack of clarity on what the implication of any restructuring, or whatever steps that banks would take to dispose these assets.
So, we are in a situation where banks are saddled with NPAs (non-performing assets). But frankly, that is something which is not easily or quite quickly resolvable, where banks can just bite the bullet and move on.
But I do feel that if you are looking at taking a haircut, then you may have to take a deep haircut and move on.
That’s the way it is.
Malhotra: There is no global solution for a lot of these assets and it needs to be resolved locally. In the infrastructure sector, rising government spend can definitely help overcome the current distress.
But the real problems is in sectors like power and steel, where banks may have to take huge haircuts mainly because of the aggressive bets companies took in the past and commodity cycle.