Get set for an avalanche of M&As in 2012 as PEs opt out

Get ready for some serious action on the mergers and acquisitions (M&A) front this year.

Reason: many of the private equity (PE) investments made in 2007-08 in some key sectors reach the end of their investment cycles in 2012. The sectors which are expected to see hectic activity are pharma, IT, real estate and infrastructure.

The seventh annual edition of Grant Thornton’s Dealtracker, which provides data and analysis on M&A and private equity, says the heightened investments made by PE firms in these sectors in 2007-08 are coming to the end of the cycle.

In fact, PE activity showed a resurgence in the face of sluggish primary markets (IPOs) and weak qualified institutional placements (QIPs). 2011 also saw a return in confidence levels which was sharply lacking in 2009 and 2010. Real estate and infrastructure garnered $2 billion of PE funds in 2011.

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[caption id=“attachment_187238” align=“alignleft” width=“380” caption=“The pharma sector, among others, is expected to see hectic merger and acquisition activity.Reuters”]  [/caption]

“PE will drive M&A activity in the coming days,” says Munesh Khanna, senior partner in charge of M&A and PE advisory at Grant Thornton. Khanna says that’s because public markets are dull and seek critical mass, leading to PEs being a preferred option.

Bain Capital and government of Singapore’s acquisition of 30 percent in Hero Investment topped among PE deals of the year, at a hefty $848 million, followed by Apax Partners’ acquisition of a stake in iGate for $480 million. Apollo Global Management’s investment in Welspun Corp ($284 million), Texas Pacific’s $256 million investment in Shriram Capital and Macquarie SBI Infrastructure’s $200 million investment in GMR Airports were the other top deals of the year. However, these amounts were still far lower than those recorded in 2007-08, when valuations reached sky-high levels.

Raja Lahiri, partner, transaction advisory services, Grant Thornton, points out that companies with a focus on the Indian consumption story rather than exports will be the favoured investment options for PEs going forward.

2011 also witnessed the ‘second coming’ of e-commerce, with PE firms and venture capitalists investing as much as $300 million in the sector. Bessemer Venture Partners’ acquisition in Snapdeal.com of $40 million valued the company at $250 million. Fashionandyou.com, Yatra Online, Naaptol Online, Dealsandyou.com and Flipkart were other deals where serious money was poured into the e-commerce space by a series of PE and venture capital funds, Dealtracker said.

M&As and PE deals put together, 2011 saw a total of 1,026 deals in India, totaling $54 billion, down, however, from 2010’s figure of $62 billion, which was clocked through fewer deals at 971. Another reversal of trend was the fact that in 2011 inbound deals were more than outbound. Seven of the 10 billion-dollar deals were inbound ones, clearly demonstrating that outbound M&A activity by Indian firms had declined.

“Having said that, the fundamentals of outbound M&A have remained intact as Indian acquirers continue to view outside markets as being strategic to their global growth plans,” Harish HV, partner, India Leadership Team at Grant Thornton, says, pointing out that Mundra Port acquired Abbot Point Port, GVK acquired Hancock coal mines and Genpact acquired Headstrong last year.

Oil and gas were big plays in the M&A space last year, with two major deals - Vedanta plc’s acquisition of Cairn India assets ($8 billion) and BP plc’s acquisition of Reliance’s energy assets for over $7 billion - being the big ones in this space.

IT and IT-enabled services (ITeS), auto, telecom, pharma, and real estate and infrastructure management were the top billed sectors last year in terms of domestic M&A.

In terms of city-wise break-ups of PE deals in the ITeS and realty and infrastructure sectors, Mumbai and Delhi slugged it out for top slot, with Mumbai barely pipping Delhi to the post, followed by Bengaluru, Hyderabad and Chennai.