Future-Warburg deal: Tough times changing mindset of Indian entrepreneurs

Indian entrepreneurs may finally be learning to let go of their businesses because of the pressures of tough times, or simply to invest in more profitable avenues. As growth shows signs of serious slackening, global markets dry up and loans become increasingly difficult to service, more and more Indian entrepreneurs may be looking to exit and pay off lenders or invest their money in newer ventures that they find more profitable.

[caption id=“attachment_331628” align=“alignleft” width=“380” caption=“Warburg Pincus will fork out Rs 550 crore for a majority stake in Future Capital, which reported a Rs 106 crore net profit,which isa 115 percent jump from the previous year.”] [/caption]

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The latest reports of Pantaloon Retail selling a 53.7 percent stake in financial services firm Future Capital Holdings to private equity major Warburg Pincus is an example of how Indian entrepreneurs are increasingly willing to let go of their holdings in key companies to either deleverage their balance sheets or generate cash for new ventures. With an economic slowdown gripping the global economy, this trend is likely to grow, experts say.

While it does not specifically refer to tough times being a key reason, a recent Grant Thornton-ASSOCHAM study on the M&A (merger and acquisition) scenario in India also points to this growing trend of Indian entrepreneurs undergoing a serious change in mindset, and being more prepared to exit, either in part or in whole, from their ventures and hand over stake to foreign players.

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Warburg Pincus will fork out Rs 550 crore for a majority stake in Future Capital, which reported a Rs 106 crore net profit,which isa 115 percent jump from the previous year.

However, despite the good showing, the Kishore Biyani-controlled Pantaloon Retail is ready to consider exiting the venture. The deal comes close on the heels of Biyani selling a controlling stake in the Pantaloon stores business to Kumar Mangalam Birla’s Aditya Birla Nuvo in a phased Rs 1,600 crore deal to cut its consolidated debt levels.

“A clear trend that is emerging now is the strategic shift in the behavioural pattern of Indian entrepreneurs, who are now more willing to sell a part or whole of their stake to exit their businesses to foreign players,” says Raja Lahiri, partner, Transaction Advisory Services, at Grant Thornton. “Attractive valuations from foreign players, given the significant growth opportunity in India, are prompting Indian entrepreneurs to evaluate exits.”

Adds Lahiri: “In my view, this is a significant shift in attitude and behavior of Indian entrepreneurs who have the open mind to evaluate strategic buyers to exit their age-old businesses and this trend is expected to continue.”

Says Ashok Wadhwa, leading investment banker and head of Ambit Group: “I think what is really happening from an India perspective is that given that there is no sign at this point of capital markets coming back to life and opportunities to raise new equity, with liquidity and interest rates continuing to be tight and inflation not coming off, more and more owners are recognising that this is going to be a long haul.”

Wadhwa says those who are significantly leveraged and borrowed money at relatively higher rates to create capacity on the belief that the India growth story would reach 9-10 percent, now recognise that they don’t have immediate ways and means of repaying those loans.

“The interest cost is killing them. So what should they do?” Wadhwa asks. “The banks also have started looking at suspect cases and put pressure on recalling money in such times. This means that given the low valuations and pressure from lenders, more owners are now willing to talk about consolidation, selloffs, selling parts of businesses, or selling non-core businesses.”

Wadhwa, like Lahiri, also feels a generic change in entrepreneurial mindset has happened over the past decade, with business owners being more prepared to sell. “From being emotionally attached, entrepreneurs have now started looking at value creation and value delivery as the sole reasons to remain engaged in business. More entrepreneurs, unlike their predecessors, are now saying that if someone else can run this business better than me, maybe I ought to do something else.”

Two major deals in the past few years, where leading entrepreneurs have sold major businesses to foreign players are those of Ajay Piramal selling Piramal Healthcare’s domestic formulations business to Abbott Laboratories of the US for a staggering Rs 17,000 crore in 2010, while the Singhs sold Ranbaxy to Daiichi Sankyo for Rs 15,000 crore in 2008.

“The Piramal and Ranbaxy cases show people are willing to sell businesses, cash in and use the money for better opportunities so that they can re-create value all over again. And that’s been the trend over the last ten years,” Wadhwa says. What’s happening now is that this trend, together with the pressures of doing business in the current environment and servicing expensive debt, is leading to more such cases of owners being open to sell out.

Another key reason, Wadhwa says, is that with US and Japan being flush with liquidity and interest rates in some countries at ten-year lows, global acquirers are now looking even more carefully at India, given the more reasonable valuations now prevalent in India. “Indian valuations and Indian promoters being in a relatively tougher situation, there are more opportunities coming along for both consolidation locally as well as acquisitions by global players.”