India Watch

Indian M&A at five-year high

Atul Monga Atul Monga

2016 was a good year for deal-makers with US$62.5 billion worth of transactions spread across nearly 1,500 deals. This was a 44% year-on-year increase in values, clocking their highest level for five years. In contrast, increasing investor caution meant that PE activity slumped, resulting in the first decline for four years.

Driven by a wave of consolidations and growing confidence in the country’s economic growth prospects, M&A activity contributed to more than 78% of total deal value in India in 2016. Private equity (PE) investments dominated transaction volumes, with around 65% of total deal volumes derived from PE and venture capital deals, although the quantum – 1,487 deals – fell significantly short of the 1,615 deals in 2015 (See Table 1). The year saw ten billion-dollar deals compared with only four such deals in 2015. These billion-dollar club deals contributed to 45% of total deal values.

Table 1: M&A deal summary 2016

Deal summary Volume Value (US$ million)
  2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Domestic 236 220 254 321 310 6,092 5,647 15,341 8,426 13,402
Cross-border 263 223 278 238 187 14,537 17,995 16,344 17,292 27,316
Merger & internal restructuring 100 58 36 11 19 14,789 4,541 3,984 2,030 7,834
Total M&A 599 501 568 570 516 35,418 28,183 35,669 27,748 48,552
Private equity 399 452 589 1,045 971 7,374 10,024 12,241 15,754 13,938
Grand total 998 953 1,157 1,615 1,487 42,792 38207 47,910 43,502 62,490
Cross-border
Inbound 141 140 162 118 88 5,985 8,741 10,368 11,329 21,020
Outbound 122 83 116 120 99 8,552 9,254 5,976 5,963 6,296

M&A deal summary – 2016

Overall M&A deal values in 2016 grew by a robust 75% year-on-year (see Table 2). This growth was driven by a wave of consolidation and big-ticket transactions in the energy and natural resources, manufacturing and telecoms sectors. A large number of these mega deals (45% of total deal values) were driven by corporates looking to consolidate their market share or pare down debt levels.

Growing domestic consumption (pre-demonetisation) and a favourable policy environment helped create significant growth in domestic and cross-border deals last year. Domestic deals (domestic non-PE deals and mergers included) also saw a major surge in activity as transaction values doubled, contributing nearly US$21 billion to total deal values. This was due to the increased volume of big-ticket transactions, which contributed to 72% of total value over 2016. There were nine deals worth more than US$500 million each and 12 deals valued at over US$100 million each, compared with only two and 13 deals, respectively, in 2015.

While outbound activity was on a par with last year, inbound transaction values recorded a five-year high valued at US$21 billion. Inbound activity witnessed six big-ticket transactions valued at over US$500 million each, contributing 83% towards total inbound value. Interest from Russia, China, Japan and Singapore contributed more than 80% of inbound deals by value.

Table 2: Top M&A deals

Acquirer Target Sector US$ million Deal type % Stake
Rosneft PJSC, Trafigura and United Capital Partners Essar Oil Ltd Energy & Natural Resources 13,000.00 Majority Stake 98%
Reliance Communications Ltd Maxis Communications Berhad-Aircel Limited Telecoms 3,582.09 Merger N.A.
UltraTech Cement Ltd Jaiprakash Associates Ltd (cement plants in five states and a grinding unit) Manufacturing 2,416.27 Acquisition 100%
Nirma Ltd Lafarge India Pvt. Ltd’s cement assets Manufacturing 1,400.00 Acquisition 100%
Tata Power Renewable Energy Ltd Welspun Renewable Energy Pvt. Ltd Energy & Natural Resources 1,380.45 Acquisition 100%
Indian Oil Corp. Ltd, Oil India Ltd and a unit of Bharat Petroleum Corp. Ltd Tass-Yuryakh oilfield Energy & Natural Resources 1,286.76 Strategic stake 30%
Fosun Pharmaceuticals (Group) Co. Ltd  Gland Pharma Ltd Pharma, Healthcare & Biotech 1,260.00 Majority stake 86%
The Yokohama Rubber Co. Ltd Alliance Tire Group Automotive 1,200.00 Majority stake 90%
ONGC Videsh Ltd JSC Vankorneft - Vanok oil field Energy & Natural Resources 930 Increasing stake to 26% 11%
HDFC Standard Life Insurance Co. Ltd Max Life Insurance Co. Ltd Banking & Financial Services 776.87 Merger N.A.

Indian M&A sector focus – 2016

More than 73% of deal value came from core sectors such as energy and natural resources, manufacturing, telecoms and pharma & healthcare. Other major contributors were the e-commerce/IT & ITes and banking & financial services sectors. Meanwhile, domestic M&A was dominated by increasing consolidations in the start-up sector, which contributed 28% of the total M&A deal volumes, followed by IT & ITeS (see Graph 1).

Graph 1 – 2016 sector breakdown by value

Graph 1 – 2016 sector breakdown by value

The energy & natural resources sector garnered deals worth US$18.5 billion, with the oil and gas sub-sector contributing 82% of the total value in the sector, some US$13 billion of this was due to Rosneft PJSC, Trafigura and United Capital Partners’ 98% acquisition of Essar Oil. The deal will give Rosneft access to Essar’s fuel retailing network of 2,700 fuel pumps.

The manufacturing sector continued to lead the charts with large consolidations in the cement sub-sector. Mega deals in the cement industry included UltraTech - Jaiprakash (US$2.4 billion), Nirma-Lafarge’s cement assets (US$1.4 billion) and Dalmia’s restructuring of its cement business (estimated at US$1.1 billion). These deals contributed 74% of total deal values in the manufacturing sector.

Telecoms (US$5.5 billion, 15% of total deal value) and pharma, healthcare and biotech (US$4.9 billion, 10% of total value) were among the other sectors that witnessed relatively high transaction values during 2016 on account of billion-dollar transactions. The pharma, healthcare and biotech sector saw a good deal of momentum, with pharma and biotech bringing in most of the action. More than 88% of deal values in the pharma sector came from cross-border transactions.

PE investments

PE investments declined for the first time in four years, falling short of the 1,000 transactions mark. In the absence of big-ticket transactions, PE investments in 2016 contributed just under US$14 billion in value compared with US$15.8 billion during 2015. 2016 also saw a smooth flow of follow-on funding rounds as companies focused on expansion and increasing scalability, while it fell short of growth capital funding rounds resulting in reduced deal values. Top deals accounted for only 37% of total PE deal values (see table 3).

Regionally, NCR, Karnataka and Maharashtra received significant PE investment interest with nearly 83% of total investments made in 2016. The year witnessed more than 90 exits (38% decline year-on-year) valued at around US$4.7 billion (21% increase year-on-year). Real estate was one of the most active sectors and open market transactions were the preferred exit route in 2016, followed by secondary sale.

Table 3: Top PE deals

Investor Investee Sector  Investment value in US$ million  % Stake
Brookfield Asset Management RelianceInfratel Ltd Telecom 1,600.00 51%
Brookfield Asset Management HiranandaniGroup- offices and retail space in Powai RealEstate 1,000.00 100%
Blackstone Group Lp MphasisLtd IT &ITES 816 60%
Fairfax India Holdings Corporation  SanmarChemicals Group Manufacturing 300 30%
Tamasek Holdings and KKR & Co  SBI LifeInsurance Company Ltd Banking& Financial Services 266 4%
Naspers Group IbiboGroup Private Limited E-commerce 250 N.A.
GIC and Abu Dhabi Investment Authority GreenkoEnergy Holdings Energy& Natural Resources 230 N.A.
TPG, Morgan Stanley Private Equity Asia,Havells India, and Vallabh Bhansali and others JanalakshmiFinancial Services Pvt Ltd Banking& Financial Services 210 N.A.
Clouse SA, Ontario Teachers’ Pension Plan,Iron Pillar and other investors JasperInfotech Pvt Ltd - Snapdeal.com E-commerce 200 N.A.
Tencent Holdings, Foxconn TechnologyGroup, Tiger Global, Bharti Enterprises and Softbank Holdings Pte. Ltd Hike Ltd Start-up 175 N.A.

Start-ups continued to dominate in terms of both deal values and deal volumes, contributing around US$2.5 billion and 70% to transaction volumes. Despite the waning momentum compared with 2015, start-ups continued to preoccupy investor interest, making the highest contributions to both investment values and volumes. Key sub-sectors for investment action were retail, logistics, enterprise infrastructure and application and discovery platforms.
 
Other major sectors contributing to overall deal value were telecoms, BFSI and real estate (see Graph 2).

Graph 2: 2016 sector breakdown by value

Graph 2: 2016 sector breakdown by value

Big-ticket consolidations among the domestic players in the telecom sector drove the sector’s investment values in 2016. Banking and financial services was another top sector with the non-banking financial company (NBFC) sub-sector alone garnering investments of US$888 million, contributing 58% of the deal volume in the banking and financial services sector. Other sectors such as real estate, IT & ITeS, manufacturing and e-commerce also witnessed big-ticket deals valued at over US$100 million.

The retail and consumer, and pharma and healthcare sectors are likely to emerge as key sectors for attracting PE investments to support the expansion of established business operations.

Conclusion

As GST and other important economic reforms play out in 2017, a further rise is expected in domestic M&A, driven by the need for consolidation in core sectors. Improvement in the ease of business rankings, partly driven by reforms and partly by methodology, should further boost foreign investment in the wake of weak global markets. Though there is already fair traction in outbound activity, this segment should witness greater traction due to the fact that the global financial gloom has thrown key assets up for acquisition at reasonable valuations and Indian corporates are likely to take advantage.

The shortage of large PE transactions in 2016 was perhaps due to the focus over the past couple of years on the start-up sector where transaction sizes have been relatively small. With macro-economic factors continuing to be positive and with reforms demonstrating early signs of economic growth, we can expect PE to shift their focus to the consumer and industrial sector to fund both organic growth and consolidation in the domestic industry. PE will perhaps be seen as an alternative means of financing consolidation for large and select corporates. This may result in long-awaited big-ticket transactions in the PE space.

The year 2016 was truly eventful for India – with a number of key reforms announced during the year, including GST, demonetisation and the seventh pay commission/OROP. With more economic reforms expected, we can expect 2017 to be just as action-packed. Having said that, challenges facing the banking sector, subdued private investment, rising crude oil prices and uncertainty in the global markets are likely to be key concerns for the country this year. However, growth in domestic consumption (after the short-term set-back following demonetisation), a strong IPO market (with nearly US$4 billion raised in 2016 and more than a dozen IPOs expected in 2017), infrastructure spending, restructuring in banks and a supportive policy environment are all expected to help keep the country’s GDP resilient in 2017.