In 2016, the Indian government’s ban on high-denomination notes, the US presidential elections, the UK’s vote to exit the EU and the US Federal Reserve’s monetary stance occupied substantial boardroom bandwidth. Despite such economic and political headwinds the M&A landscape remained robust with India’s overall deal value reported to have reached a record high of US$52.6 billion.
It is difficult to predict with any certainty if these levels of consolidation will continue in 2017 as M&A activity depends on several macroeconomic and geo-political factors. However, some of the themes that may dominate the Indian M&A landscape in 2017 are as follows:
Private equity buyout: In the past couple of years, we have seen increasing instances of private equity funds buying controlling stakes in Indian companies. This trend is likely to continue as (a) promoters may continue to cede control or even fully exit from their existing ventures, especially the non-core ones, and (b) private equity funds are reported to have record levels of dry powder ready to deployed.
As per some estimates, funds’ liquid assets stand at roughly 35% of the total value of inbound deals announced last year. While the figures look attractive, in the absence of a robust domestic market for acquisition financing and with the US monetary policy tightening, private equity funds are likely to be selective with deals.
Stressed assets: The level of stressed assets in the Indian banking system has almost doubled in the past three years. Therefore, it is not surprising that the Reserve Bank of India and the government have rolled out series of policy, legislative and regulatory measures including forcing the banks to take over companies and then divest them to third party suitors.
It was widely believed that these measures would facilitate M&A in the stressed asset space. However, they have turned out to be a damp squib thus far for reasons such as disagreement on valuation of the assets and level of write-off for banks. This is not to say that the future holds no promise. The resolution of stressed assets is bound to happen at some point and M&A will play a central role in such a resolution process whether it is in the form of acquisition of stressed assets by strategic or financial sponsors or consolidation of banks or even privatization of public sector banks.
Telecom: Consolidation in the telecom sector has been on the anvil for some time. The entry of a new player with substantial financial resources at its disposal has increased competition in an already competitive market and may have provided the trigger for consolidation in the sector. The consolidation that kick-started in 2016 is likely to continue this year.
The aspect to watch out for is going to be the structure of the deals, especially the deal currency, and the manner in which the capital is raised to fund the deals, particularly because the balance sheets of most of the telecom companies are already stretched after the previous spectrum auctions. If recent trends are an indicator then all-stock deals are likely to be the preferred option, especially in large mergers. Telecom companies may also explore monetization of non-core assets or adjustment of the acquisition price against liabilities of the target such as pending spectrum payments.
Shareholder activism: Since the 2008 financial crisis, shareholder activism has increased globally and India is no exception. The tightening of the corporate governance norms and changes to shareholder redressal mechanisms have emboldened minority shareholders. Thus far, the activism theme has largely remained confined to governance matters such as related-party transactions, managerial remuneration, etc. In only a handful of cases activists have threatened to or blocked a deal, forced a divesture or engaged in proxy fights.
However, with the increase in diffused shareholding patterns in Indian companies, growing influence of proxy advisory firms and an enabling regulatory environment, boards are likely to spend more time evaluating potential shareholder threats.
Antitrust: Globally, the antitrust scrutiny of M&A deals has increased significantly. In India, too, antitrust review has gained significant momentum in the past few years. As of this date, only three M&A deals have undergone a detailed investigation in India and no deal has been blocked. If the level of consolidation continues as it has in the past few years then antitrust aspects of a deal are likely to occupy a larger space in boardroom discussions.
Shuva Mandal is a partner and the national practice head of corporate, M&A and private equity at Shardul Amarchand Mangaldas. Ankit Mishra is a senior associate. The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the official view or position of the firm.