A revival of inbound and outbound mergers and acquisitions is adding colour to India Inc
India-related merger and acquisition deals totalled US$44.2 billion in the first three quarters of 2010, a 24.5% increase in volume terms over the corresponding period last year, according to data from the London-based Mergermarket Group, a data service that tracks worldwide M&A. VCEdge, a Noida-based venture capital tracking service, puts the total at closer to US$50 billion.
This year took off with a bang: In the first quarter, Indian firms invested US$12.6 billion in 44 mergers and acquisitions involving foreign targets, according to global business and financial consultancy Grant Thornton. The value of these deals was 75 times more than in the same period of the 2009, when 15 outbound deals with a total value of US$228 million were recorded.
Then in June, Bharti Airtel – India’s largest mobile phone operator by subscriber numbers – announced it had completed its US$9 billion acquisition of most of the overseas assets of Kuwaiti Mobile Telecommunications Co, known as Zain, covering 16 African countries. And 2010 has already seen the emergence of a number of other major deals, such as Essar Minerals Resources’ takeover of US-based Trinity Coal Corporation for US$600 million.
Herbert Smith, led by global corporate division head Michael Walter and London corporate partner Alan Montgomery, advised Bharti Airtel, a new client, on the Zain deal. “Due to the sheer size and scope of this deal, a huge Herbert Smith team of more than 150 lawyers worked on this deal alongside Indian law firm AZB & Partners in order to bring it in successfully and to a tight timeframe,” says John Partridge, the firm’s India client relationship manager in London.
Telecommunications has been one of the dominant sectors in Indian M&A. Another major industry deal was Bharti’s US$300 million investment in Warid Telecom International, the fourth largest mobile company in Bangladesh. AZB & Partners, led by partner Gautam Saha, advised Bharti Airtel on the purchase of the stake.
A bigger canvas
Analysts say a desire for growth amid cheaper overseas assets is fuelling the M&A surge. “As several countries are going through a period of stress and low growth, lots of companies from those countries are available for takeovers at very reasonable valuations,” says Jagannadham Thunuguntla, a strategist and head of research at SMC Global Securities. “As Indian companies have been flush with cash resources, thanks to 8%-plus gross domestic product growth, they are aggressively pursuing cross-border acquisitions.”
In addition, Indian companies are grabbing what they can in Africa, Asia, the Middle East and Latin America to compete with expansion by rivals in China, Brazil and Russia. They can often move faster than their Chinese counterparts, for example, in terms of identifying and acquiring a suitable target. While Chinese acquisition plans can take months or years to come to fruition as part of a national strategy, India’s “promoter” culture of powerful controlling shareholders allows for quick decision-making.
For law firms – both international and Indian – the return to M&A activity is greeted with enthusiasm as part of an overall resurgence in financial activity. “There has been a significant increase in the M&A, private equity and infrastructure activity in the country,” says Rabindra Jhunjhunwala, a partner at Khaitan & Co in Mumbai. “The revival of real estate, capital markets and many more strategic acquisitions taking place reflects the confidence in the Indian economy.”
India’s buoyant economy has prompted a revival of outbound deals. Companies are keen to capture assets overseas to tap into new markets and bolster revenue.
“From an outbound M&A perspective, business confidence is high and many Indian companies continue to have regional, even global, leadership aspirations where M&A is playing an important role in their growth strategy,” says Sameer Nath, director of M&A at Citigroup Global Markets India in Mumbai. “Indian acquirers are no longer at a competitive disadvantage relative to their overseas peers in terms of funding certainty when bidding for assets.”
Resources companies, especially in traditional fossil fuels, will continue to be attractive targets for Indian companies, say analysts. “Essar Oil and Reliance Industries are seen as global consolidators of refinery assets, while European and American companies are facing intense pressure, low margins and low valuations for their refineries,” according to a recent Mergermarket report. Essar agreed to buy Trinity from Denham Capital Management in March in one of the largest purchases of US assets by an Indian company. Elsewhere, Gujarat-based Adani Enterprises, part of the Adani Group, acquired the coal mine assets of Linc Energy of Australia for a cash and royalty package worth US$2.7 billion to expand the group’s energy business. In Indonesia, Ira Eddymurthy and Arfidea Saraswati of Jakarta-based SSEK advised the Adani Group in its US$1.6 billion railway, coal terminal and industrial estate project in Tanjung Api Api, South Sumatra province. Meanwhile, Integrated Coal Mining Limited (ICML, which is part of the Calcutta-based RPG Group) bought a 10% stake in Australia’s Resource Generation Limited for A$10.5 million (US$10.3 million). Khaitan & Co advised ICML.
While few other deals are as large as these, corporate India is making a number of key purchases in strategic developing markets. Godrej Consumer Products recently bought an Indonesian household insecticide maker, Megasari Makmur Group, and hair care companies in Argentina and South Africa to strengthen its presence outside India. (For more coverage of Indian investments in Latin America, see A new American dream?, page 31.) Redington India, which provides supply-chain services to the computer industry, acquired Turkish computer equipment distributor Arena Bilgisayar Sanayi & Ticaret for US$42 million in September.
Infrastructure has also seen some significant deals. KEC International, a listed Indian company and one of India’s largest makers of electricity transmission towers, acquired 100% of US-based SAE Towers Holdings for US$95 million. White & Case and Khaitan & Co advised KEC, while HoganLovells acted for the seller, a unit of ACON Investments.
Steering the deal through
What are the key tasks for law firms and corporate counsel when bringing an M&A transaction to fruition?
Khaitan & Co has advised on more than 20 deals so far in 2010, making it one of the largest domestic M&A advisers in the country. Rabindra Jhunjhunwala, a partner at the firm, highlights some of the roles lawyers must play to ensure a transaction achieves fruition:
- Structuring the investment from a regulatory, tax, competition law and (sometimes) an operational point of view;
- Choosing investment instruments, which requires an understanding of the prevailing policies (including foreign investment policies, where relevant) and the regulatory framework;
- Structuring of enforceable exit options, especially in respect of private equity and financial investors;
- Structuring mechanisms and incentives for retention of key employees and management, and ensuring smooth transition and structuring non-compete provisions (where required);
- Building protection in the investment documents against potential liabilities.
In-house lawyers tend to sit in the driver’s seat during M&A negotiations. “In-house counsel manage all aspects of the transaction and take the lead on the negotiations,” says Benjamin Adams, director of legal and intellectual property at the Indian unit of Nokia in Gurgaon. “We keep most of the key activities in-house when operating in the markets that are most familiar to us, but rely on outside counsel with drafting, contract review, based on our guidance of key terms, and some negotiation support, depending on the size of the deal and jurisdiction.”
Jhunjhunwala concurs, saying that in-house counsel are in the best position to guide the transaction from a commercial point of view. But he adds, typically, “advice relating to structuring and documentation for a transaction should be delegated to outside counsel.”
As deals grow larger, companies sometimes struggle to achieve corporate integration, especially across borders. Analysts often point to Tata Tea’s acquisition of Tetley a decade ago, in which an Indian company faced integration issues after buying a much larger and more technologically advanced company than itself. “Legal should also help guide the integration and be focused on that from day one,” Adams adds.
Risk evaluation is also vital, say counsel. “From the risk mitigation standpoint, the contract is important,” says Adams, but he emphasizes that the real risks are priced into the deal and cannot be resolved purely by relying on contract provisions that may be difficult to enforce. He also advises that the risk of leaks should be viewed as substantial in India and that contracts should have a good arbitration clause.
Inbound activity: seizing assets in India
While outbound activity reaches new peaks, one of this year’s most significant M&A deals was inbound: US drug-maker Abbott completed its US$3.72 billion purchase of India’s Piramal Healthcare in September. Andrew Edge, a London partner at law firm Stephenson Harwood, led the team advising Piramal. “This disposal justifies their position as one of India’s leading entrepreneurial companies in any sector, not only pharmaceuticals,” he said at the time of the Abbott deal closing.
Indeed, lawyers around the world are gearing up for a major outbound push towards acquiring Indian assets. “India’s long-term commitment to continue opening up its M&A market through a sustained programme of legal and policy reforms is helping to drive global interest from investors looking to participate in its fast growing economy,” a recent Clifford Chance report noted.
Other large deals in 2010 include the acquisition of Essar Telecom Infrastructure for US$450 million by an affiliate of American Tower Corporation and Telenor ASA’s purchase of a 7.15% stake in Unitech Wireless for US$433 million.
Despite this, international investors have been relatively cautious when pursuing acquisitions in India. There were only 23 inbound M&A transactions in the first quarter of 2010 with a total deal value of just over US$1 billion.
“The soaring value of Indian M&A investments abroad dwarfs the value of inbound investments in the year-to-date, although the increase in the number of Indian M&A transactions is mainly driven by domestic deals,” Anuj Chande, head of the South Asia group at Grant Thornton in London, noted in a recent analysis. “We expect continued outbound activity and predict increased inbound activity as the international economy improves,” he added.
Some securities analysts expect that the Abbott-Piramal acquisition will herald a new round of larger inbound deals. “Considering the fact that India is one of the rarest combinations – a high growth economy with good domestic demand – one can reasonably expect inbound deals to grow in numbers as well as in deal size going forward,” says Thunuguntla.
International financial institutions have certainly been busy with inbound India deals. Japan’s Sumitomo Mitsui Financial Group (SMFG) purchased 4.5% of Indian lender Kotak Mahindra Bank for about US$296 million in June. Darshika Kothari, a partner at AZB & Partners, advised SMFG on the deal, which is subject to approval by Kotak Mahindra shareholders and regulators.
In April, Baltimore-based investment management company T Rowe Price Group bought a 26% stake in India’s UTI Asset Management Co and UTI Trustee Co for about US$145 million. Freshfields Bruckhaus Deringer and Indian firm Platinum Partners advised T Rowe Price while Mona Bhide of Dave & Girish & Co and SH Bhojani of Amarchand Mangaldas advised the UTI entities.
New York investment bank Warburg Pincus injected US$85 million into Mumbai-based Metropolis Healthcare, India’s largest medical diagnostic group, in September. Amarchand Mangaldas managing partner Cyril Shroff represented Warburg Pincus and Vishwang Desai of Desai & Diwanji acted for Metropolis.
Legislative and regulatory conundrums
Despite such deals, some in-house lawyers still hold lingering doubts about investing in India. “Key deterrents remain for big inbound M&A deals,” says Benjamin Adams, director of legal and intellectual property at the Indian unit of Nokia in Gurgaon, citing regulatory uncertainty, a stronger rupee and issues concerning ownership and control, related-party transactions and the US Foreign Corrupt Practices Act.
Domestic in-house counsel can also be cautious. “Being from the pharmaceutical industry, I think the regulatory part plays a greater role in concluding the deal,” says Vivek Mittal, chief legal counsel
for Mumbai-based Lupin, a maker of generic pharmaceutical products. “For acquisitions we generally analyse product portfolio – both current and pipeline – and their regulatory approvals.”
India’s complex framework of interlaced foreign exchange regulations is a potential pitfall, mainly because the Indian rupee is not freely convertible, lawyers say. “The pricing requirements promulgated by the Reserve Bank of India also make traditional exit mechanisms difficult to put in place,” says William Kirschner, chair of the India practice and head of the Asia M&A and private equity practice at White & Case in Singapore.
One issue clouding the future status of M&A in India is the proposed amendments to the Takeover Code. Major provisions include an increase in the acquisition threshold for the initial trigger of an open offer from the current level of 15% to 25% of the voting capital, and an increase in the open offer size to 100% from the existing 20%.
Investors have also been confused by various press notes on foreign investment issued by the Indian government over the past year. “The notes, including the consolidated FDI policy of India, have led to considerable ambiguity in relation to the investment structures being deployed for the purpose of foreign investment into India,” says Jhunjhunwala. “This means that a lot more thought and preparation is required while advising on such investment structures.”
Possible changes to the Competition Act are another concern. “The recent proposed amendment to the Competition Act will hamper M&A in India as it makes it compulsory for companies to seek prior approval from regulatory authorities for any ‘combination’, whether merger, acquisition or amalgamation,” says Rahul Mahajan, a partner at Wakhariya & Wakhariya in Mumbai. The approval process could take 210-270 days. “No seller would be willing to wait that long,” he says.
In addition, the proposed Direct Tax Code contains general anti-avoidance regulations that could subject investments into India from jurisdictions such as Mauritius and Cyprus to greater scrutiny. “The impact of these provisions is unclear at present, but they have the potential to affect future M&A deals,” says Kirschner.
There are also aspects affecting Indian companies pursuing targets abroad. Lawyers say Indian acquisitions of US companies – such as Essar’s acquisition of Trinity Coal – are attracting greater scrutiny from the Committee on Foreign Investment in the US (CFIUS), originally set up as a national security measure by the Defense Production Act of 1950.
Indian companies are increasingly diversifying into what CFIUS has traditionally regarded as strategic sectors, such as telecoms, transport, and energy. “It is expected therefore that as the diversification continues, more India transactions will be subject to CFIUS scrutiny,” Valerie Démont, a partner at Pepper Hamilton in New York, noted in a recent report.
In the UK, local laws can also affect the M&A ambitions of Indian companies. “One of the key areas upon which we advise Indian buyers is the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006, upon a purchase of a British business and assets, as distinct from the shares of a UK company,” says Jonathan Morris, a partner with Berwin Leighton & Paisner in London.
Canadian regulations also affect Indian investors. “For any Indian company involved with a first-time acquisition in Canada or a first-time major investment in Canada, there is a learning curve,” says Sunny Sodhi, an associate with Torys in Toronto. “Certain types of sectoral investments involve particular consideration, including oil and gas, mining, energy and financial services.”
Not all M&A activity has been cross-border. In fact, there is plenty of activity domestically as Indian companies acquire one another. According to the Grant Thornton data, the first quarter of 2010 saw 116 M&A transactions with a total value of US$2.9 billion that involved both an Indian acquirer and target. This is nearly five times more deals than in the corresponding period in 2009, when 25 domestic M&A deals had a combined value of US$3.3 billion.
The largest ones include that of GTL Infrastructure, which acquired the cellular phone tower assets of Aircel for US$1.8 billion. Smaller deals include Mahindra & Mahindra’s announcement in May that it had acquired a majority stake in electric car company Reva, of Bangalore, for about US$10 million. Khaitan & Co partners Ravi Kulkarni, Nikhilesh Panchal and Joy Jacob advised Mahindra & Mahindra.
Another Mahindra unit, IT services company Tech Mahindra, is expected to merge with Mahindra Satyam before the end of 2010. (Long-time Mahindra group legal adviser P&A Law Offices in Delhi is expected to advise on the deal). The merger will be a remarkable end to a saga that began with Tech Mahindra’s acquisition of Satyam in 2009 after an embezzlement scandal felled the latter.
Analysts say Satyam’s survival as a largely independent entity – its revenues are about twice that of Tech Mahindra’s – is a testament to Indian M&A resilience under pressure. “This underlines that crisis management has proved to be quite robust in the Indian corporate world, thanks to the timely coordinated efforts of all the regulators involved,” says Thunuguntla.
Indian companies are also becoming better at turning down deals they are not completely satisfied with.
“Indian corporates are not overpaying the valuations,” says Thunuguntla. “That was clearly visible in the case of Fortis Healthcare walking away from the deal with Parkway.” The former had been mulling over acquiring a 23.9% stake in the latter from TPG Capital for US$685.3 million.
But they are willing to pay large amounts for desirable targets, says Thunuguntla, citing Reliance Industries’ rejected US$14.5 billion offer to buy LyondellBasell, a large Rotterdam-based maker of polypropylene and polyethylene materials.“Indian corporates are finding a nice balance between aggression and sensibility.”
Law firms and analysts are upbeat about M&A prospects for 2011. “With M&A markets bouncing back from recession in India and GDP growing, we think M&A activity will increase into 2011 compared to 2010,” says Partridge.
While continuing to snap up assets in emerging markets, corporate India is also likely to continue its push into developed markets with strong resource bases. “We expect that Canadian strategic investment into India will continue to grow steadily, especially since Canada and India have decided to move forward on a comprehensive economic partnership agreement and a nuclear cooperation agreement,” says Sodhi.