India Inc's overseas takeover party resumes

Cross-border deals are back after a brief lull in 2009. And, investment bankers say 2010 is going to be the year of outbound deals.

The tide turned in February after a rather slow start in January, which saw 15 outbound deals valued at $341 million. Among the done deals was Renuka Sugar acquiring a controlling stake in Brazilian sugar maker Equipav for Rs 1,530 crore (Rs 15.3 billion) and Religare Enterprises buying a California-based fund of funds, Northgate Capital, for around Rs 1,000 crore (Rs 10 billion).

Reliance Industries' $14.5 billion bid for bankrupt chemical maker LyondellBasell would have been added to that kitty if the American company's board had not rejected the Indian company's overtures. Reliance, however, is pursuing a Canadian oil sands group, Value Creation, through a $2-billion bid that, bankers say, is likely to go through.

February also saw Bharti Airtel announcing exclusive talks to acquire Zain Telecom's African assets for $10.7 billion (about Rs 49,000 crore). The fate of that deal will only be known later this month.

The month saw just one significant inbound deal - American Tower Company buying out Essar Telecom Infrastructure for Rs 2,000 crore (Rs 20 billion).

Experts say one major reason for the possibility of more outbound deals is the fact that valuations of troubled overseas assets have risen enough for them to be willing to discuss options. Last year, they had no choice but to wait out, with valuations near all-time lows.

"Deals never happen when valuations are much below their implicit value," said Ajay Garg, managing director, Equirus Capital, a Mumbai-based investment bank. "As the global market improves, the targets are coming close to their implicit value and this is helping the deals get through," he said.

The lull in outbound deals in 2009 followed three preceding years of outbound overtaking inbound with Indian companies acquiring foreign firms such as Corus, Jaguar Land Rover, and Novelis.

"Both Indian and companies abroad are now opportunistic and looking at deals," said K Balakrishnan, managing director and chief executive officer, Lazard India, local arm of the global investment bank. "Circumstantially it is the right time for Indian companies to look for assets overseas available at attractive valuations, while companies abroad are still cautious with the global economy still on the recovery path," he said.

In 2009, outbound deals fell short of inbound ones in terms of value. Some 82 outbound deals worth $1.37 billion were closed against 79 inbound deals valued at $3.88 billion.

The figure for outbound deals could have been higher but for the fact that many deals that were on the drawing board last year did not materialise. For example, Sterlite Industries attempt to acquire the US-based copper miner Asarco for $2.56 billion failed. Also Bharti Airtel's second bid for South African telecom firm MTN in September 2009 fell through on account of regulatory issues.

"The confidence of Indian companies has returned and access to capital is much easier," said Vedika Bhandarkar, managing director and head of investment banking at J P Morgan India, the local arm of the global investment bank. "Outbound deals will at least be equal to inbound deals this year" she predicted.

Companies such as Vedanta Resources, the holding company of India's most diversified base metal producers, raised about $4.7 billion (Rs 21,620 crore) in the current financial year through American Depository Receipts, Foreign Currency Convertible Bonds etc. The company says its group companies such as Sterlite and Sesa Goa are on the lookout for the right opportunities for inorganic growth.

In the current financial year, Indian companies raised at least Rs 41,000 crore (Rs 410 billion) from qualified institutional placements when the Sensex, the benchmark index of the Bombay Stock Exchange, rose about 75 per cent to 17,000 on Wednesday from 9,708 at the end of the last financial year.

According to stock exchange announcements, about 90 Indian companies have announced their intention to raise an additional Rs 70,000 crore (Rs 700 billion) through QIPs in the coming months. Easy access to capital markets has helped the companies de-leverage their balance sheets.

Experts suggest sectors like pharma, IT and automobiles will be the front runners as far as outbound deals are concerned. However, sectors like hospitality and steel also have a huge potential."

A large proportion of outbound acquisitions by India Inc in terms of value has so far been in the North American region, which accounted for as much as 32 per cent of the total outbound deal value, followed by Europe, which that accounted for 23 per cent of the total outbound deal value.