More buyout deals likely in a slowing PE market

More buyout deals likely in a slowing PE market

Bangalore: Private equity (PE) funds slowed their investments in India during 2008 but say they aren’t averse to so-called buyout deals that allow them to take control of a company by buying at least 50% stake.

This preference for buyout deals will accelerate in 2009, predict PE investors.

Nexgen Capitals Ltd, the investment banking arm of New Delhi-based financial services house SMC Global, notes that that 13 such buyout transactions took place in 2008, up from 11 in 2007.

Also See Buyout Deals in 2008 (Graphic)

Meanwhile, deals data from consultant Grant Thornton adds up to $17.14 billion (Rs83,129 crore today) worth of total transactions that year, at least 118% more than 2006.

PE deals, however, have taken a beating this year. The number of PE deals between January and November had an announced value of $10.11 billion compared with $15.73 billion in the year-ago period, according to Grant Thornton.

Such deals in India have been dominated by PE firms buying significant minorities in what are called growth- and late-stage companies rather than buyout deals that are more common in more developed markets. Investors say, however, that with the economy slowing and a liquidity squeeze, promoters who traditionally were reluctant in giving up controlling stakes have started doing so.

“Buyout opportunities are emerging due to the strategic choices being made by promoters in the current scenario," says Nainesh Jaisingh, managing director, Standard Chartered Pvt. Equity Advisory (India) Ltd. “In 2009, a lot of business houses will strategically look at their business…whether to sell controlling stakes or continue with the business."

Of the 13 controlling stake deals this year, four were in real estate and infrastructure management, and three in banking and financial services, two in pharma, health care and biotech, while commodity exchange, aviation, oil and gas, and media and entertainment counted one each.

Each of the 2008 deals had a different rationale, notes Jagannadham Thunuguntla, head of equity at Nexgen, citing the example of Dawnay Day AV, which sold out fully to New Silk Route Advisors for $50 million.

“The banking and financial services firm could not survive (as) 2008 was a bad year to be in financial services. Under such circumstances, the promoters had to sell out," he notes.

Meanwhile, Future Capital Holdings Ltd acquired Centrum Direct Ltd for $18.75 million and Centrum Wealth Managers Ltd for $6.25 million for strategic reasons, as taking over a smaller player made more sense for the company than starting a firm on their own, says Thunuguntla.

Thunuguntla says buyouts have not been triggered by low valuations, as believed, as promoters opting to be taken over get what is called as a “controlling premium". Such a premium is an extra of 20-50% in the company’s valuation to compensate promoters losing the reins of the company.

Even so, says Raja Kumar, chief executive and managing director, UTI Ventures, PE players are happier with a controlling stake that allows them to run the company and benefit from selling a similar large stake through a private share sale, merger or acquisition, or a public offer.

Such deals in India will surge in future, irrespective of how other PE deals fare, he predicts.

Graphics by Ahmed Raza Khan / Mint