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Cover Story

“The mood is of caution with changing laws”
Girish Vanvari, Exec. Director & Head – M&A & PE Group, KPMG India
Issue Date - 18/08/2011
B&E: Faced with increased interest rates and a revision in SEBI takeover code, how is the current M&A sentiment in India?
Girish Vanvari (GV): Debt raising is getting more and more difficult as interest costs are going up. And that’s why people are going to fall back on private equity. So the private equity model is becoming the recourse for taking care of debt financing. The recent takeover amendment, which has raised the open offer trigger limit to 25%, is a very interesting move for the market. Directionally, that may take the PE model up. Another interesting perspective is transactions, which are strategic in nature.Accordingly buyouts, JVs and partnerships are the norm; as foreign companies which are not operating in India are trying to get a foothold into the Indian market by taking stakes/buyouts in local company.

B&E: As compared to H2, 2010, during H1, 2011, except inbound deals, the avg. value of domestic & outbound deals fell dramatically. In the coming quarters, will the overall avg. deal size fall further?
GV: Inbound deals are going to get larger and larger. Look at Cairn-Vedanta, Reliance-BP and some to be announced stuff which companies are working on. As Indian entrepreneurs look at partnerships and in some cases even sellouts, deal size will go up. However, the reverse is the case in the case of outbound deals where size is decreasing, though the number of deals are large. Past experiences have turned Indian companies cautious in borrowings.

B&E: They say, companies in all sectors that have a high domestic consumption are appealing greatly to buyers at the moment. Do you agree?
GV: Leaving real estate and infrastructure, which are struggling a bit, opportunities range across sectors. Particularly anything to do with the Indian domestic consumption story, in inbound is really in. For instance, FMCG, NBFC, auto and auto ancillaries, food chain, retail, et al are on.

B&E: And what about IT and telecom? They have been considered particularly ripe for M&A, haven’t they?
GV: With respect to deal making in the IT sector, many companies are sitting on idle cash. There are not too many targets to acquire, and the valuations are also high. Moreover, as the value of the rupee is appreciating, the sector will come under pressure. In telecom, with margins under pressure, one may see consolidation in the domestic sector. Further, there is still some consolidation left in telecom infra space.

B&E: The Vodafone case, the ruling in the case of Aditya Birla Novo and Idea Cellular, changes in the takeover code, new competition bill – do these prove that the government is encouraging M&As? What is your suggestion for potential buyers at this juncture?
GV: The government is doing its bit to plug loopholes in the M&A tax and regulatory regime; the recent Takeover Code amendment and the Competition Act are a case in point. However, any change creates its own set of uncertainties in interpretation and execution, which is what corporate India is presently going through, In the backdrop of the Vodafone and Aditya Birla Nuvo rulings, the mood is that of caution with changing laws. I am confident that in the long run, these changes will pan out right; but in the short term, it’s certainly creating uncertainty. I would say that at this point, acquirers have to be more particular about valuations, withholding issues and the regulatory environment. Further time taken for deal closures should be appropriately factored in as well.



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