M&A deals are back on fire but valuation concerns remain

Given the financial stress in Europe, Indian firms with ready cash reserves are showing a lot of interest in value hunting overseas. But whether they are ready to take the big bets remains to be seen.

According to global consultancy firm Grant Thornton, India saw a total of 90 mergers and acquisitions valued at around $3 billion in October as hope for reform implementation and clarity on general anti-avoidance rules (GAAR) gave an impetus to the deals in India.

Even though the overall business environment has not changed much, a slew of reform announcements by the government since mid-September seems to have buoyed the spirits of India Inc. A lot of Indian companies sitting on massive cash piles are scouting for suitable acquisitions in the international market.

Over the last month, there has also been a lot of buzz about big Indian firms eyeing trophy assets abroad to spruce up there global image.

In September, Hyderabad-based Rain Commodities acquiring Belgium-based coal tar pitch maker Rutgers for $0.92 billion. Kolkata-based CESC too bought a stake in BPO company Firstsource Solutions Ltd for over $50 million.

On Monday, Oil and Natural Gas Corp agreed to pay ConocoPhillips about $5 billion for a minor stake in a big Kazakh oilfield. The deal would be the sixth-largest overseas acquisition by any Indian company. This was followed by Indian Hotels launching a $1 billion acquisition bid for an overseas company - Orient Express in the US.

The sense that India may finally be ready to discover its taste for foreign assets got stronger when Mahindra & Mahindra expressed interest in acquiring 49 percent in British luxury sports car maker Aston Martin.

However, in both instances the deals are stuck due to valuation issues. Given the slowdown in Europe, both Indian companies are quoting prices way lower than their peak valuations.

So while the outbound transaction by several well-funded conglomerates has risen, in-bound transactions have not picked up at the pace that they should as foreign firms are still on the wait and watch mode given thedomestic barriers of endemic corruption in many business houses. Moreover, many industrialists are constrained due to rising debt levels and leverage. Only companies with stronger balance sheets and a good record of corporate governance seem to be on the radar for offshore firms.

“The other aspect is also about many Indian promoters wanting to do deals by not ceding control, which is a major issue when there is an overseas buyer,” K Balakrishnan, chairman and managing director of Lazard India Pvt Ltd, h ad said earlier in an interview with Business Standard .

Hopefully, with the Parliament impasse ending over FDI in retail and the government showing its resolve to implement reforms will boost investor confidence and deal street would sizzle once again by the end of this year.

Already,a report in the Business Standard points out that deals worth over $10 billion are likely to be signed in the next week alone.

“These include Videocon’s sale of gas assets worth Rs 16,500 crore in Mozambique, sale of Agila speciality unit by Strides Arcolab for up to Rs 11,000 crore, sale of Saudi lubricant unit Petromin (an equity value of Rs 3,850 crore) by the Hinduja brothers, Jet Airways’ sale of 24 percent stake to Etihad Airlines for up to Rs 2,200 crore, and sale of a unit by Claris Lifesciences to a Japanese company for Rs 2,200 crore,” the BS report said.

Even the cash-rich telecom sector is ready for consolidation.

Several reports suggest that Tata Teleservices and Norway’s Telenor are in talks to merge their India operations to create a telecom behemoth, while Russia’s Sistema Shyam too is open to the M&A option to retain its subscribers.