Back Indian corporate finance deals — International private equity investors dominate
James Winterbotham
Kai Taraporevala
Private equity investors were primarily active in the information technology and telecom sectors. Deals involving trade investors, in contrast, remained lukewarm in the second half (H2) of 2004, but, as INDATA predicted in 2003, the market continues to deepen with interesting deals in sectors such as media, logistics and breweries. We believe that more such sectors that have been marginal contributors so far, for instance auto components and textiles, will begin to dominate India's M&A market in the future.
The broad numbers
The flat M&A market reported by INDATA in H1 2004 continued in the second half as India saw 174 deals valued at Rs 123 billion compared to the 179 deals of the first half valued at Rs 111 billion. Full-year 2004 figures of Rs 234.1 billion worth of announced deals are comparable to the Rs 213.12 billion seen in 2003.
The year however saw 10 deals of value over Rs 5 billion compared to four in 2003. H2 2004 itself recorded five such deals. While the average size of deals in 2004 was Rs 663.2 million, it was only Rs 371.31 million in 2003. The higher deal values in 2004 are not, we believe, a one off occurrence, with pioneers in the Business Process Outsourcing (BPO) space such as General Electric choosing to exit their investments in BPO operations, and with large logistics companies such as Gati Ltd looking for strategic partners, bigger deals are likely in 2005 as well.
Sectors, key deals and important players
The year 2004 was dominated by the IT and telecom sectors. These two sectors contributed as much as 48 per cent of the total deal value of 2004, with IT contributing 32 per cent and telecom 16 per cent.
IT (48 deals worth Rs 74.7 bn)
The BPO sector saw large private equity investments in H2 2004. The largest deal of 2004 was the acquisition of a 60 per cent stake in GE Capital International Services (GECIS) by General Atlantic Partners and Oak Hill Capital Partners for $500 million. GECIS is regarded as one of the pioneers of the Indian outsourcing sector and General Electric's decision to sell a controlling stake in GECIS reflects the fact that independent BPO providers are now aggressively offering quality services. International companies such as GE see no need to retain captive units in India. The deal is an echo of the 2003 deal when Warburg Pincus acquired 70 per cent stake in WNS Global Services from British Airways. American Express owns two large captive units in India, and the GECIS deal might prompt this and other such deals in the future.
While GECIS was the largest BPO deal in the second half, Barclays Bank invested Rs 1.64 billion in acquiring a 50 per cent stake in Intelenet Global Services Ltd. from HDFC. Intelenet was originally a joint venture between HDFC and Tata Consultancy Services (TCS), with each owning 50 per cent stake. Before its Rs 50-billion IPO, TCS sold its 50 per cent stake in Intelenet to HDFC (for a similar Rs 1.6 billion), which, in turn, invited Barclays to partner it in the outsourcing venture.
Telecom (13 deals, Rs 37.6 bn)
As was the case with IT, the largest telecom deal in 2004 was a private equity investment. In H2 2004, an investor group led by Capital International acquired 3.3 per cent stake in Bharti Televentures from Warburg Pincus for Rs 9.6 billion. Singapore Technologies and Telemedia, and Telekom Malaysia further cemented their hold on Idea Cellular. As INDATA reported, they acquired 33 per cent in Idea from AT&T in H1 2004 for Rs 9 billion. In H2 2004, they invested a further Rs 8.5 billion in a preferential allotment amounting to 15 per cent, taking their total stake to 48 per cent.
Other significant deals
Though smaller in value, several of the deals in 2004 are indicators to future trends. DHL acquired an 88 per cent stake (subject to subscription to open offer) in Blue Dart Express, thereby obtaining a firm foothold in the domestic courier market to supplement its international express delivery operations. DHL acquired 51 per cent from the promoters of Blue Dart, Tushar Jani, Kuhsroo Dubash and Clyde Cooper. Schroders Capital also sold its 17.21 per cent stake. Including the mandatory tender offer for 20 per cent, the acquisition will cost DHL Rs 7.33 billion.
Having established Star TV as India's leading entertainment cable channel, Rupert Murdoch made his first steps into backward integration. His group acquired 32 per cent stake in Balaji Telefilms, India's leading maker of Hindi television serials, the staple diet of Star TV. Balaji is Star TV's leading supplier of serials. While the 32 per cent stake cost Star TV Rs 1.88 bilion, as per its agreement with Balaji Telefilms, Star TV has to limit its stake in Balaji to 26 per cent. Balaji has informed INDATA that Star TV has yet to decide how it will reduce its stake to 26 per cent. The television software industry is still very fragmented and in need of consolidation to reduce the cost of making programmes. Internationally, the television industry is highly integrated; the big broadcasters also make software. India too looks likely to follow this trend with Bertelsmann recently indicating its interest in acquiring Indian television software-makers.
Though 2004 was devoid of large corporate restructurings such as the Reliance Industries deal of 2002, it did see an important share swap deal in the oil and gas sector.
As INDATA reported in 2002, the desire of the then Petroleum Minister to keep his portfolio intact saw the Indian Oil Corporation acquire 53.58 per cent in IBP Ltd. Indian Oil completed the integration of operations in H2 2004 — IBP is also a petroleum product marketing company — by acquiring the balance 46.42 per cent in IBP. The value of the shares issued by IOC to the public shareholders of IBP is Rs 6.7 billion.
Scottish and Newcastle firmed up its ties with Vijay Mallya's United Breweries group by acquiring 37.5 per cent (subject to subscription to the mandatory open offer) in United Breweries Ltd., the flagship company of the group, for Rs 4.7 billion. This deal has to be seen against the background of South African Breweries' acquisition of a 50 per cent stake in the breweries business of United Breweries' arch rival Shaw Wallace in 2003.
Private equity deals
The year 2004 saw the highest private equity investments — over 90 per cent of which were from overseas — in the last three years. The increased interest shown by private equity players since H2 2003 continued into H2 2004 as well.
H2 2004 is the largest half-year for private equity deals since 1999, when INDATA started tracking the market.
In addition to the BPO and telecom industries, India now offers private equity firms several emerging sectors to back. Air Deccan, the recently launched low-cost air service, the first of its kind in India, has proved promising enough for Capital International and ICICI Ventures to acquire a 26 per cent stake (possibly higher depending on the exercise price of the convertible) in the company for Rs 1.8 billion.
Private equity deals accounted for 43 per cent of the H2 2004's deal value.
The biggest PE deal was the acquisition of a 60 per cent stake in GE Capital International Services (GECIS) by General Atlantic Partners and Oak Hill Capital Partners for $500 million.
Capital International announced investments worth $234 million in 2004, while Warburg Pincus announced investments worth $277 million.
Other major PE acquirers were Temasek of Singapore, Merlion (a JV between Temasek and Standard Chartered Bank) and Westbridge Capital Partners.
These companies announced total deals of $132 million. Deals by the above companies are jointly managed by headquarters in the US or Singapore, along with an Indian office which aggressively sources new investment opportunities.
Private equity realisations
While private equity investors started to commit larger amounts to India in 2004, other investors made profitable exits. Two of the largest deals in 2004 involved realisations by private equity investors.
Capital International purchased a 3.3 per cent stake in Bharti Televentures from Warburg Pincus for Rs 9.6 billion.
IBM's Rs 7.4-billion acquisition of Daksh eServices included the purchase of a 65 per cent stake from General Atlantic Partners, CDC (now Actis) and Citigroup for Rs 4.8 billion.
Another recent exit was by Schroder Capital, which sold its 17 per cent stake for Rs 1.4 billion when DHL acquired courier company Blue Dart.
International acquirers
Large deals like the Idea cellular deal and the deals by international private equity players saw international acquirers contribute 73 per cent of total deal values in 2004, the highest since 1999.
Looking ahead
The phasing out of the Multi-Fibre Agreement (MFA) from January will benefit India's larger textile companies such as Raymonds, Alok Industries and Arvind Mills.
China and India are expected to be the largest beneficiaries from the end of the quota regime that the MFA protected. Private equity investments in textile firms are likely in 2005 as the WTO has forecast that India's share of the US market for textiles will eventually increase to around 15 per cent from the present 4 per cent begins to fructify.
From January 1, 2005, an ordinance amending the Patent Act, 1970 will come into effect that will make India patent laws compliant with TRIPS. Parliament is expected to ratify this ordinance and make it a law in February.
In the past, Indian pharmaceutical companies were allowed to copy drugs patented abroad as long as they used different manufacturing processes.
The new law can be expected to remove this anomaly, and hence encourage international pharma companies to seek a greater Indian presence and increase supplies to the Indian market, as well as to invest in India as a manufacturing base.
More PE deals can also be expected as Indian pharma companies seek funds to be invested in primary R&D.
(The authors run India Advisory Partners, a corporate finance firm focused on cross-border M&A deals into and out of India.)
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