India Inc did record M&A deals in the financial year 2016-17 as the economy is showing positive signs of recovery, companies went for asset sales, balance sheet repair is underway and quarterly results are reporting an uptick. Some of the big-ticket deals were Rosneft-Essar oil acquisition, Idea-Vodafone merger and Airtel-Telenor merger.

M&A data from EY show that in 2016-17, deals worth $61 billion were signed in India as compared to $28 billion the year before. Foreign investors were interested in Indian companies and some sectors like telecom, cement, oil and energy saw wave of consolidation because of changing market dynamics.

Mergers to grow

One of the largest transaction of the year was the $12.9 billion acquisition of Essar Oil Ltd (98% stake) and Vadinar Port by Russia’s state-controlled petroleum giant Rosneft Oil Company-led consortium. The oil & gas sector led in terms of the deal value, followed by the financial services sector. It was followed by Vodafone-Idea merger, and Airtel-Telenor deal.

From a volume perspective, the technology, infrastructure and financial services sectors dominated, accounting for nearly one-third of the total announced deals. Sector-wise, information technology clocked the highest number of deals, though small in volume. The sector attracted deals worth $5.9 billion, followed by banking and financial services with deals worth $2.3 billion. Country-wise, Canada topped the list in deals as companies like CDPQ, Canada Pension Plan Investment Board, Brookfield Asset Management and Fairfax Financial Holdings have made significant investments in deals.

Fire sale aids M&A

Infact, the year 2016-17 saw record number of fire sales as companies across sectors struggled with stressed balance sheet, projects not taking off and banks burdened with bad loans. A significant momentum behind India’s M&A activity was driven by an increased consolidation across sectors as companies divested distressed assets in an effort to reduce debt. On the other hand, corporates with stronger balance sheets were seen deploying funds towards acquisitions and consolidating their market positions.

During the boom period, many companies in sectors like real estate, power, infrastructure expanded their business by borrowing heavily. Companies got funding from banks at cheaper rates, private investors pumped in money in the business and foreign investors, too, bought their greenbacks. In many cases, companies ended up biting more than they could chew, which led to debt in balance sheets and wide scale default. Data from Thomson Reuters show that Indian companies have sold more assets in 2016-17 than they have in any year since liberalisation.

However, with the slowdown in the economy, many companies could not keep their revenue stream going and instead started selling their non-core assets. The situation got complicated as various government policies changed and there were a lot of activism over environmental issues by non-governmental organisations. Many loans given by banks turned bad assets and the recovery process just did not happen.

Notable M&A deals

Essar Oil and Rosneft: The deal worth $13 billion in the Oil & Gas sector was one of the biggest last year. Russian oil major Rosneft, its partners and Essar Oil sealed deal announced in October, under which Rosneft and its partners will take over India’s second largest private oil firm Essar Oil. The Competition Commission has given them the green signal. Under the deal, Rosneft will purchase a 49 per cent stake in Essar Oil’s refinery port and petrol pumps. Netherlands-based Trafigura Group and Russian investment fund United Capital Partners split another 49 per cent equity equally. The remaining 2 per cent remains with minority shareholders after the delisting of Essar Oil.

The deal will give Rosneft access to Essar’s fuel retailing network of 2,700 fuel pumps. It factors in Essar Oil’s debt of about $4.5 billion and about $2 billion debt with the port company. The deal has an enterprise value of close to $13 billion, including Essar Oil’s debt of $4.5 billion and around $2 billion debt with the port company and power plant. About $3 billion dues to Iran for past oil purchases will continue to be on Essar Oil books.

Vodafone-Idea deal: Idea Cellular and Vodafone India have merged to form country’s biggest telecom company. According to the deal, Vodafone will hold 45 per cent stakes in the new company, while Idea Cellular will have a command over 26 per. The merger is a major step towards a consolidation trend that has been evident for some time in the telecommunications industry after the launch of Reliance Jio and the extended free-offer period.

Aircel & Reliance Communication merger: In the telecom sector, Anil Ambani-led Reliance Communications and Maxis Communications, promoters of Aircel have merged their wireless businesses to form the fourth-largest telecom operator in the country. R-Com will demerge its wireless business and transfer it to the new entity, while the standalone business will focus on the enterprise segment and data centre businesses. Sistema will continue to hold 10 per cent in standalone R-Com. RCom’s overall debt will reduce by Rs 20,000 crore ($3 billion) or over 40 per cent, and Aircel’s debt will reduce by Rs 4,000 crore ($600 million), upon completion of the transaction in 2017.

Jaiprakash Associates and UltraTech Cement: In the cement sector, Jaiprakash Associates Ltd signed a deal to sell 75% of its cement business to UltraTech Cement Ltd. The transaction will give debt-laden Jaiprakash a breather in its attempt to stave off creditors seeking to take over the company. The deal was valued at Rs 16,189 crore ($2.4 billion) including debt. UltraTech will also spend Rs 470 crore to complete an under-construction grinding unit. The deal will help UltraTech, the single-largest cement firm in the country in terms of capacity, to again overtake its Swiss construction materials rival LafargeHolcim, which controls Ambuja Cements and ACC in the country.

Lafarge and Nirma: In a jaw-dropping deal, Ahmedabad-based cement player Nirma Ltd bought Lafarge India for an enterprise value of about $1.4 billion (Rs 9,400 crore) including debt. The transaction is part of LafargeHolcim’s 3.5 billion Swiss franc ($3.6 billion) divestment programme. The deal was the second biggest in the cement sector in 2016-17.

Going forward

The robust M&A momentum is expected to continue through 2017, owing to continued positive macroeconomic outlook for the country, a sustained focus on reforms by the government at the Centre amid optimistic investor sentiment and the government’s focus to improve business and investment climate in the country. Foreign investments are picking up because of the government’s liberalized and reforms-oriented policies, especially for big ticket investments. Sectors like technology, life sciences and financial services are expected to attract significant investor attention. Moreover, the spate of fire sales by companies is likely to continue in 2017 as many companies with stressed balance sheets may find it difficult to raise fresh funds.

With scale expansion becoming a critical element of India Inc’s corporate strategy agenda, consolidation is likely to dominate the M&A agenda across sectors. Also, the government’s proposal to abolish the FIPB in the Union Budget FY17-18 will further liberalize the FDI policy and encourage foreign investors. Companies looking for expansion through buyouts should look at cheaper valuations before signing deals.

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