On today's episode of India on the Move, we will explore the various themes pertaining to mergers and acquisitions. We will discuss the challenges, opportunities as well as its future outlook.

Mergers and Acquisitions (M&A) are an integral part of any economy. The Indian M&A landscape is no different with businesses really taking the M&A route to achieve growth here as well.

On today's episode of India on the Move, we will explore the various themes pertaining to mergers and acquisitions. We will discuss the challenges, opportunities as well as its future outlook.

To discuss this we are joined by Topsy Mathew, Managing Director, Head of Corporate Finance - Asia & South Asia Standard Chartered Bank, Cyril Shroff, Managing Partner Cyril Amarchand Mangaldas and Renuka Ramnath, Founder & CEO Multiples Alternate Asset Management.

Now Mergers and Acquisitions are an integral part of any economy. The Indian M&A landscape is no different where business is taking an eminent route to achieve growth here. In today’s episode of ‘India On The Move’, we’ll explore the various themes pertaining to Mergers and Acquisitions and we’ll discuss the challenges, the opportunities as well as the future outlook. I’ve with me, an eminent panel there: Topsy Mathew of Standard Chartered Bank, well-known corporate lawyer Cyril Shroff joining us in the studio, and we also have with us Renuka Ramnath, founder & CEO Multiples Asset management Pvt. Ltd. joining us in the discussion. Thanks so much for joining us.

M&A Challenges and Opportunities

Nisha: First of all congratulations to you Mr. Shroff for completing 35 years as a corporate lawyer & it’s only right that you set the agenda of this discussion, and tell us - What are your observations on the Deal Street? Is there enough activity?

Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas: I think activity is picking up and there are number of themes which are driving this. One big theme is the debt theme, which itself has many sort of dimensions to it. Then there’s a consolidation theme as well, and I think we’re seeing activity around each of this. So, let me come to the 1st theme, the debt theme itself, which is basically creditor-driven M&A. And there are two branches to it. One is Bankruptcy-code or the IBC - related activity which has sharply picked up in terms of resolutions which are on the cards. No case has yet been resolved through this method, though; there is one which has just got completed. The RBI’s 12 cases, which are as they go through the system, some of them will result into resolution which would probably be deals in some form or the other.

And even without the IBC-related cases there are many assets which are facing some kind of stress or the other - many of them in the infrastructure space, which have resulted in transactions or M&A deals, whether in the cement space or other forms of infrastructure. So, that’s one big theme that is driving it. Many of IBC cases that were filed are sort of 6-9 months through. So, in the next couple of months, as I said, in a nine-month time-table will mature into transactions or resolutions or liquidation. I think liquidation will be very value-destructive. So, I think you’ll see in the next quarter or so - a sharp uptick in some kind of resolution as many of the cases are in the pipeline as well as more are coming.

So that is sort of one stream, and then there is consolidation-play as well. So, we’re seeing that in telecom, we are seeing that in financial services, we’re seeing that in E-commerce, infrastructure as well. So, these are two big themes which are driving it, and the stock markets are at an all-time high, and they are also clearly playing a big role in driving activity.

Understanding M&A Dynamics

Nisha: Of course, so all these 3 themes are at play Mr. Shroff, but I will pick from where you ended. On the consolidation bit as well so even in e-commerce, where consolidation has been attempted, it did fail and we’ve seen in the last few weeks that a few of the deals failed as well. So, it’s not just conservation of the deal activity but there are failures as well. Is it difficult to do deal-making? Also the probabilities and the success rates - How do you rate that Topsy?

Topsy Mathew (Head of Corporate Finance – Asia and South Asia): Nisha, at the end of the day, the deal dynamics have not fundamentally changed in the recent times. But what has happened is that some of the stresses like Cyril just mentioned, like debt- related issues, have increased the complexities that one needs to deal with in conservation of transaction - the e-commerce transaction being slightly different. But he other deals where there are significant leverage-related issues bring about their own set of complications. It has got a wider set of stakeholders which you need to manage and it also has certain timelines which put added pressure in terms of conservation. Some of this is also extending the overall timeline. So, deals take a lot longer than it historically took, and there we are working a lot but there is a lot longer that each of these transactions are taking. So partly, the probabilities have reduced thanks to the complexities but you have extended timelines as well.

Cyril Shroff: So execution challenges clearly remain. It takes much longer. Just 2 days ago we closed a complex deal . Rosneft and the EOL transaction, I mean it did really drag down over 2 years. But thank God it got completed

Nisha: So deal conversions have been taking a lot of time since layman times to 2008, we’ve seen that deal conversion has always taken a longer time.

Cyril Shroff: And also due to regulatory uncertainty.

Trends

Nisha: Yes, but let me take us through Renuka Ramnath where the moolah lies for any deal to get consummated. So Renuka Ramnath, give us an understanding of the investor mindset. First of all, are you spotting many opportunities when it comes to debt-laden sector; and the twelve cases which have been put on the block or where resolution is happening & many others in the pipeline as well?

Renuka Ramnath, Founder & CEO, Multiples Alternate Asset Management: Yeah, so the debt- laden opportunity is, of course, interesting for us. But I would say that the way that the ecosystem is today with respect to understanding the realisable value of the debt, and coming to a conclusion quickly, so that Private-Equity investors like us can take a position – we are not there at all. I think it’s going to be a long journey - bankruptcy code & all the other precursor regulations that we’ve seen from RBI, putting a lot of power in the hands of the bank, is indeed very helpful. But, still, I think it’s going to be a journey. It’ll take at least 2-3 years in my opinion - to see very hectic deal-flow coming from this opportunity set. Having said that, I would say that we were extremely delighted with the two M&A transaction that we did for PVR, first buying Cinemax and then buying DT Cinemas – which has created enormous value for PVR shareholders and we are as Multiples of course significant beneficiaries having invested in both the transactions.

Here, I would like to bring the dimension of the Competition Commission. I think that, somewhere, there is a need to realize that through consolidation, creating companies which are of economic size & scale where they’ll remain relevant both within India and in the global context, is very important. And CCI guidelines indeed pose huge delay challenges- in many situations, even this very question of whether this consolidation will indeed go through successfully, is a very big barrier in terms of pursuing consolidation opportunities, which are, I would say, absolutely critical for Indian companies. It’s not a question of just making money or pursuing something fashionable but just to earn the ticket to be around profitably, we need to facilitate consolidation of companies and many-many industries bring the benefit of the economics coming from the consolidation - both to the consumers and to the shareholder.

Nisha: So Renuka Ramnath made several points here. But one of the points which has been voiced by most of the investors looking at the debt-laden sector - They’ve been telling us that they are walking into it blindfolded. They really don’t know what’s in store. Do you see many deals really flowing in?

Cyril Shroff: So it’s a valid point because the creditor-driven process whether it’s IBC or otherwise- I think there will be limitations in terms of the due diligence that you can do or the kind of indemnities that you can get because it’s a deal that happens under high stress. So I think that’s fair enough as eventually it gets priced up into the transaction as well. So the ultimate resolution of this stress is almost reflected in the price. But it’s different from doing a non-stress deal. The dynamics are completely different.

Nisha: So it’s lender-driven, but what about some companies that, are not in the 12 list? And there are many more who are given 6 months timeline to come up with solutions. Are you saying many of the corporates really doing a proactive job of resolving a job and therefore landing up in a deal?

Topsy Mathew: I think that currently in a market beyond these 12 names, there is a much longer list of corporates which are taking proactive steps. Everyone used to push the limits in terms of what before you get to the resolution point, but today what we’re seeing is a lot more proactive approach. Some of these companies are now starting to get to the end of that life cycle as well. An example- Companies which have constraints in capital in any form – be it raising new capital or high leverage capital. You start seeing them divest business in advance and the markets are also rewarding them significantly. Just to take an example, which Renuka’ll be familiar with as well, is Tata communications. They, over the last these several years, have undertaken multiple strategic moves - divesting their African business, divesting controlling stake in their data centre business, because of the constraints of capital. As a result, you are seeing a significant uptick in valuation and a re- rating of the business. It’s very clear that the markets are willing to reward you for it. Therefore, a lot of companies are taking these proactive steps. There are entities which have taken acquisitions which have gone wrong. They are now increasingly quick to correct these mistakes rather than just carry on with the legacy .

Nisha: Welcome back, You are watching ‘India On The Move’ and the discussion is Mergers & Acquisitions. A lot of consolidation has really taken place. Let’s figure out where is the money really coming in from?

So Renuka Ramnath - do you think that more and more buyout opportunities and control buyouts are being done by Private-Equity players? Secondly-The new concept that has also come into the market because the strategics do not have a lot of money pump in, but they do not want to miss out on any such assets being available - then can the Private-Equity partners really back them?

Renuka Ramnath: I think consolidation is a very-very important theme for Private-Equity players and this is one opportunity that everyone, at least in the Indian market, we are waiting for it to happen and explode. So, as I mentioned to you, every consolidation that we’ve financed has made very significant economic returns.

But I would still say Nisha that there are two important opportunities that we are looking at in the Indian context. One is the debt-driven opportunity that you’ve been talking about. In the debt-driven opportunity I would still like to urge that banks will have to prioritize on speed. The 2nd important aspect that I still find missing is that when a fresh investor is bringing in money, the investor is bringing money to make returns on his investments and not to protect previously-given debt which has gone bad. So there has to be much greater realism brought into what is the potential value in asset and a huge focus given on speed for the resolution of the same for these opportunities to really become a very big opportunity.

The 2nd opportunity which has not happened, to the extent it should, is consolidation merely for creation of value. Many of the Mergers that we are talking about today - whether it is Idea-Vodafone or whatever, are consolidation-driven - I would like to say under pressure, under no other alternative- and you are trying to get some economics. That, in itself, doesn’t make it bad or irrelevant. But I would like to see another aspect of consolidation where companies within the same industry are coming together to drive efficiency and create value. That’s something that Private-Equity investors would very eagerly support.

Nisha: Right. I’ll take that last point you made and toss it through to Topsy - Consolidation is a big theme that is conjoining with the debt-laden sector as well. And the point that she made that it’s not just under pressure but to create value. How do you see that aspect?

Topsy Mathew: Some of the larger transactions that we’re seeing market, as Renuka mentioned, the Idea Vodafone or the RCom Aircel, they quite have a telecom theme to it -is under significant market pressures – under duress

Nisha: …duress...presented by new players…

Topsy Mathew: Yes, but as a result, what you are seeing a rational course, people are moving forward and it is absolutely important to drive these transactions towards consummation because without that that the survival is in question. But the 2nd bucket of transactions, which Renuka referred to - the value-creating transactions and the deals, which drive a better outcome independent of any pressures – those are still far and few. There are still attempts but consolidation where there is no need – that is still a not an everyday instance.

Nisha: Ok, let me counter that. Renuka, do you think that some of the financial services consolidation have not been so much under distress but more for creation of value and probably complementing each other’s portfolios?

Renuka Ramnath: Yes. That is true in financial services and also in PE-led space, we have also seen a few transactions and in fact, we invest with the explicit objective of consolidating those companies with bigger companies that can bring, especially the liabilities-side advantage in a financial-services play.

Nisha: Alright. I’ll give the final word to Topsy then. From your vantage point how do you see the deal flow continuing? And any few things, in terms of regulating hurdles, which can be cleared off for the financial investor, for the foreign investor to invest more in India?

Topsy Mathew: I think from a general outlook perspective, I think the markets are doing well. From an M&A perspective I think that there’s a gentle uptick and clearly we’re seeing a good deal flow. So it’s looking positive. In terms of things that can be better there have been significant regulations that have come into play in India - GST – it has been very positive. We’re clearly seeing a scenario where there’s regulatory stability for a fairly long time, and I think none of the challenges we had on the tax front, exist today.

Cyril Shroff: Dismantling FIPB

Topsy Mathew: Yes, I think that is a big positive. But you know if I may pick one area where there could be little bit more work is still around delistings in India – I think there is still capital available to take companies private potentially, relist later those sort of opportunities we miss out on because of the challenges that people face in delisting and taking companies private .

Cyril Shroff: Yes, and an interesting trend that people will see in a year or two – is Hostiles, and not just necessarily through the open-offer route, but the IBC and bankruptcy process is going to allow hostile acquisitions being made through this process. Because anyone can come bid in the resolution process. The promoter and the debtors power to sort of resist has been taken away and it’s with the creditors. So the dynamics where the promoters could hold out against hostile acquisitions - that has fundamentally changed. So, if I would do just a little bit of forecasting in terms of new trends for the next one or two years - Watch out for the hostile theme.

Nisha: And that’s precisely the reason why one of the promoters, while closing one deal, has made enough money to build the war-chest to bid for his own asset when it goes for the bid process. Well, a very very important takeaway - more hostile bids expected and I know many cases where other companies did not put up a bid but now they will come and now want to buy those strategic assets as well.

Alright thank you so much. Topsy, Cyril Shroff, Renuka Ramnath for joining us. With that we end this very-very interesting discussion.