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 M&A structures and regulation in India

Share of carve-outs in M&A deals rises as firms hive non-core assets
October, 03rd 2019

According to the Bain-CII India M&A report, the share of carve-out deals among non-distressed asset deals has increased in salience from 27% in 2015 to 33% in 2018, with many headline deals over the last four years being carve-outs.

Large Indian corporates are increasingly selling down businesses that are not core. This trend is adding to the mergers and acquisitions activity too, in recent times. The share of carve-outs in mergers and acquisitions (M&A) deals have increased over the last few years with companies increasingly trying to sell-off their non-core assets to reduce debt as well as to focus on their strategic businesses. A carve-out is a deal in which a company or a conglomerate sells certain businesses, assets, or exits certain geographies.

According to the Bain-CII India M&A report, the share of carve-out deals among non-distressed asset deals has increased in salience from 27% in 2015 to 33% in 2018, with many headline deals over the last four years being carve-outs.

Puneet Renjhen, executive director, investment banking at Avendus Capital, explains there are two emerging trends with larger Indian companies in terms of carve-outs. “There are certain businesses which are non-core, i.e. either they are not synergistic with other business verticals or return on capital is lower than threshold, and hence they are not getting right capital allocation and management bandwidth to scale them,” he said.

Renjhen points out that the second trend is where corporates want to grow a business vertical given the market potential but the business model requires a partnership with a financial investor for reasons which could include limiting capital risk, operational expertise and market/product access.

Examples of carve-outs include GlaxoSmithKline selling its consumer healthcare business, including its health food drinks portfolio, to Hindustan Unilever, and L&T’s exit from its electrical and automation business via a sale to Schneider Electric. The sale of Kalpataru’s power transmission assets to CLP to reduce debt and focus on strategic diversification can also be seen as a carve-out.

Market experts believe, going forward, the sale of non-core businesses could be in sectors like infrastructure, hospitality, industrial units, especially auto components, telecom assets etc. Carve outs may also be seen wherein companies create new platforms for growth purpose with external capital and strategic partners.

“My view is you will see at least $8-10 billion per annum coming into India in the near term towards carve-out transactions,” Renjhen said. The Bain-CII report explains that one of the risks in carve-out deals include the rapid decay of target in the form of attrition of critical employees, vendors and partners— both prior to and post closure.

Apart from attrition, there is a risk that the target parent may want to retain key people and or assets with themselves, which could lead to loss of business context for senior management or operational value in case of other partners, the report stated. Linkages across IT, financial reporting, people, and intellectual property (IP) can lead to a surge in operational costs or even affect operational continuity post closure, it said.

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