Domestic M&As surge to a four-year high in 2014

In all, Indian companies have concluded 247 M&A deals worth $16.17 billion this year, according to data from Grant Thornton India Llp. That’s the highest since 2010, when 373 domestic deals worth $18.3 billion were reached.

The deal value, including 20 M&As valued at over $100 million each, is a nearly threefold jump from 2013, when 218 transactions were closed.

“One of the major factors for higher domestic deals has been that large cash-rich companies are investing more capital,” said Raj Balakrishnan, managing director and co-head of India investment banking at Bank of America Merrill Lynch.

Indian companies across sectors are seeking expansion, betting that the economy will accelerate after two years of sub-5% growth. Some are divesting assets to raise cash for repaying debt and reducing interest costs.

In November, Kotak Mahindra Bank said it was acquiring ING Vysya Bank in an all-stock transaction that will create India’s fourth largest private sector lender with nearly Rs.2 trillion of assets and 10 million customers.

In April, Sun Pharmaceutical Industries agreed to acquire Ranbaxy Laboratories, controlled by Japan’s Daiichi Sankyo Co. Ltd, in an all-stock deal worth $3.2 billion that will create the world’s fifth largest generics (or off-patent) drug maker by revenue. Sun Pharma also agreed to assume $800 million of Ranbaxy debt.

In the latest big-ticket transaction, UltraTech Cement Ltd on Tuesday agreed to buy two cement plants and related power assets of Jaiprakash Associates Ltd in Madhya Pradesh for $870 million, giving the country’s biggest cement maker the capacity to cater to lucrative markets in that state and neighbouring Uttar Pradesh. It’s the fifth biggest acquisition in India this year.

It was the second sale of assets by the Jaypee Group this year. On 16 November, Sajjan Jindal’s JSW Energy Ltd said it will buy two hydroelectric projects from Jaiprakash Power Ventures Ltd for $1.5 billion in cash.

For the Jaypee Group, the divestments will help it pare debt estimated at $9.67 billion.

Another company that raised money to reduce debt was Lanco Infratech Ltd, which in August sold its 1,200 megawatt Udupi power plant in Karnataka to Adani Power Ltd in a $967.74 million deal in August. Lanco had $5.81 billion of debt as of 31 March.

Such deals are expected to shift assets from relative weak entities to financially stronger groups, besides helping reduce debt on corporate balance sheets.

“The entire economy was clogged till earlier this year and most of the big-ticket deals that have happened this year have been stressed asset sales by highly leveraged companies. Banks are also pushing companies to sell assets as buyers are emerging in the market,” said Vineet Toshniwal, managing director at Equirus Capital Pvt. Ltd.

A number of companies reviewed their operations this year and chose to let go of assets that aren’t central to their main business, according to Balakrishnan of Bank of America Merrill Lynch.

“This year , M&A (activity) has been driven by power, cement and commercial real estate companies. They make up 60-70% of the total deal value this year,” said Ashutosh Maheshvari, managing director and chief executive officer at Motilal Oswal Investment Advisors Pvt. Ltd.

Bankers expect deal activity to remain strong in 2015, although the focus may shift towards companies looking to acquire assets for growth as economic growth accelerates.

“People have started working on deals which are more focused towards growth opportunity and we expect big deals to be announced in pharmaceuticals, auto components, building materials and information technology space next year,” Maheshvari said.

The article appeared in the Mint. The article can be found here.