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M&A sees revival as India finds sweet spot
October, 07th 2009

When Reliance Industries, Indias largest private sector company, raised Rs31.9bn ($683m) in a share placement last month, a murmur ran through the market. Perhaps the oil and petrochemical group, controlled by Indias richest man, Mukesh Ambani, was girding itself for a global acquisition?

The countrys companies, among the most aggressive overseas acquirers during the boom years of 2006 and 2007, have pounced on the rebound in global stock markets to rebuild their balance sheets. Now, after the dearth of large mergers and acquisitions over the past 18 months, some are on the hunt again.

The stars are aligned for India Inc to re-engage in cross-border acquisition activity, albeit in bite-size deals, says Tarun Kataria, managing director and chief executive of global banking and markets at HSBC India. We have a confluence of abundant domestic liquidity and re-opened domestic and offshore equity and credit markets.

Only a few months ago such a proposition would have seemed crazy.

As elsewhere in the world, the collapse of Lehman Brothers in September 2008 brought capital markets in India to a complete halt, leaving many large groups that had made overseas acquisitions, such as Tata, Aditya Birla and Suzlon Energy, in some difficulty.

But in April, the market suddenly started to show signs of life. Unitech, a large listed property developer that had become over-stretched during the boom years, raised $325m through a share placement to institutional investors.

This was followed by the election of a stable Congress Party-led coalition government in New Delhi in May. The benchmark Bombay Stock Exchange Sensex index rallied and today is up nearly 70 per cent since the end of last year.

The trickle of new equity issuances turned into a flood, with the share placements followed by initial public offerings, including the $1.2bn listing of the governments flagship hydropower group, NHPC.

In the first nine months of this year, companies in the Indian subcontinent have raised $15.5bn, or 27 per cent more than during the same period in 2008, according to Dealogic, the data company.

In one sign that things have come full circle, Reliance Communications, the mobile operator controlled by Mukesh Ambanis estranged brother, Anil Ambani, announced the $1bn listing of its cellular tower unit Reliance Infratel. Mr Ambanis group was the last to tap the market in 2008 when it raised $3bn from the IPO of its electricity company, Reliance Power.

Theres a fair amount of optimism in the air, says Ravi Kapoor, head of South Asia capital markets origination at Citi. He says the market is heading into a sweet spot, in which all forms of capital are becoming available again, from straight equity and debt to convertible bonds and bank loans. This will last at least until the next interest rate tightening cycle begins some time next year.

Theres a lot of pent-up demand. The government needs capital and corporates also need capital, he says.

This has prompted talk that the healthier Indian groups might begin to leverage their generous market valuations to acquire cheap targets in overseas markets.

Mr Kataria, of HSBC, says the Sensex is trading on a price to earnings multiple of about 18 times 2010 earnings, which is a premium to many developed markets. Indian companies are also likely to face less competition for targets than in the past.

Given the state of the leveraged finance markets globally, I believe the Indian strategic buyer is better positioned to access acquisition finance than a private equity firm, says Mr Kataria.

Bankers predict a rise in acquisitions next year by Indian information technology, automotive, oil and gas, coal and other companies. Many Indian IT companies were interested, for instance, in Perot Systems of Texas, for which Dell has offered $3.9bn.

Others caution that, for now, most Indian companies remain concerned with restructuring or plugging the gaps in financing for pre-existing projects and investments.

Large offshore acquisitions are also more challenging than in 2007 because of the difficulty obtaining funds to leverage the balance sheets of target companies.

Still, the first sign of life in the Indian global acquisitions market was provided in May when Bharti Airtel, the countrys biggest mobile operator, revived a $23bn plan first explored last year to take over MTN of South Africa.

The talks collapsed last week because of regulatory issues. But Bhartis controlling shareholder, telecoms entrepreneur Sunil Bharti Mittal, reiterated that he was still looking for global acquisitions.

Youre seeing signs that at least conversations are starting on M&A, says Vedika Bhandarkar, head of investment banking at JPMorgan in Mumbai.

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