BackStrategic investors take on bulge-bracket PE firms to acquire assets
While price remains the most important factor, sellers prefer strategic investors as they understand business complexities better, say investment bankers
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When Birla Corp. Ltd closed the ₹ 5,000 crore deal to acquire Lafarge SA’s cement assets on 18 August, it emerged as an unlikely contender, beating heavyweight private equity (PE) funds like Barings Private Equity (Asia) and Blackstone Group Lp.
“Some of the key reasons why they could clinch the deal was they had the financial balance sheet strength to acquire the asset, the experience of operating cement plant in that geography and they have an established distribution network in east India. Having a robust distribution network is a critical factor in successfully running a cement plant," said a banker involved in the deal.
An email sent to Birla Corp. on Thursday evening remained unanswered.
This isn’t a one-off case where strategic investors have beaten bulge-bracket funds to win deals. In another big-ticket transaction, on 31 July, French bank BNP Paribas SA acquired retail brokerage firm Sharekhan Ltd for nearly ₹ 2,200 crore even though large funds such as Warburg Pincus and General Atlantic were seen as frontrunners.
The deal went in favour of BNP because the funds were seeking indemnity against regulatory issues that may crop up, said a person involved in the transaction.
In an email response, BNP Paribas declined to comment and so did Tarun Shah, chief executive officer at Sharekhan.
On 4 August, The Economic Times reported that Parkway Hospital, owned by Malaysia’s biggest healthcare group IHH, has acquired 74% stake in Hyderabad-based Global Hospitals, beating PE fund TPG Capital Management.
While the price paid remains the most important factor, investment bankers and consultants say that in most cases, the sellers prefer to sell the assets to strategic investors as they understand the business complexities better. Strategic investors have also been faster in closing deals, they say.
“The strategic buyers are hungry for assets and they are flexible in structures, which PEs are generally not akin to and they are moving in faster to close deals," said Ajay Saraf, executive director at ICICI Securities Ltd.
For instance, in the Lafarge case, it was felt that Birla has a ready marketing network that will be beneficial for the divested units. In the Sharekhan case, BNP was willing to take on the regulatory risk given that its already present in this sector and is familiar with the regulatory terrain.
“Cement or such other core industries,!face significant developmental and on the ground operational challenges, cyclical in nature, and have been going through a tough phase in recent times. As a result we have not seen many examples of private equity firms operating such assets on their own in India, rather they have preferred to partner established industry players", said Anjani Kumar, head of investment banking at CIMB India.
Bankers say that signs of a pick up in the Indian economy is another reason why strategic investors are pursuing assets aggressively by paying more than PE funds.
According to Grant Thornton India Llp, for the first half of 2015, strategic M&A (merger and acquisition) deal value stood at $15.8 billion across 277 deals.
“Traditional private equity investment thesis would be based on a viable exit mechanism and the right exit multiple in typically three- to five-year horizon, to ensure an above hurdle return. This constraints their ability to bid competitively vis-a-vis strategic investors, in a number of situations. Sometimes we also see them joining hands particularly where PEs need industry partners to operate the asset or derive operational synergy, classic examples being recent bids in healthcare." Kumar said.
According to an investor who is exiting Global Hospitals as part of the deal with Parkway Hospitals, strategic investors are willing to pay more as they know which synergies they want to create.
“Also there have been recent instances where the government approval for some PE funds had been rejected or have taken months on end. People want to close deals faster and now that strategics are offering more money deals are closing quickly," he said, requesting anonymity.
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