Merger and acquisition (M&A) deal value in the segment has declined by half to $1.75 billion till date in 2015 compared with $3.5 billion in the corresponding period last year, according to data from consulting firm Grant Thornton. The value of deals struck this year is the lowest since 2012.
Private equity (PE) transactions in the sector have also dipped 55% till date in 2015 compared with the corresponding period last year. This year has seen 33 deals worth $326 million, compared with 43 transactions worth $733 million in the year-ago period.
The decline of interest in the traditional retail and consumer sector comes at a time when investors have been pouring money into e-commerce firms. In the first half of 2015, the information technology (IT) and IT-enabled services (ITeS) sector, which include e-commerce, saw M&A deal activity more than double to $2.8 billion from $1.3 billion in the year-ago period.
PE investments in IT-ITeS rose 80% in the first half of 2015 to $2.7 billion from $1.5 billion, according to data from Grant Thornton.
Other factors may be at play, too.
“There is a certain class of promoters who feel that there will be a pickup in the market and are now in a wait-and-watch mode hoping to get better valuations,” said Vivek Gambhir, managing director at Godrej Consumer Products Ltd. “In the short term, the buyers are also facing constraints as borrowing costs remain high and valuations are also high.”
Also, the first half of 2014 saw higher-value deals being closed, possibly led by the perception then that a new pro-business government could help ease foreign direct investment norms in multi-brand retail, according to a report by Grant Thornton. Those expectations have been belied.
This year’s deals include the Rs.1,651 crore ($260 million) acquisition of the hair and scalp care business Kesh King by Emami Ltd from Himachal Pradesh-based SBS Biotech. Kesh King was valued at 5.5 times its annual sales of Rs.300 crore and 11.4 times its 2014-15 Ebitda (earnings before interest, tax, depreciation and amortization).
“In India there is a dearth of good brands and hence for the good brands, valuations are never low. It’s a case of opportunities and depends on what the purchaser can do with the acquired business,” said Harsh Agarwal, director at Emami.
Emami is open to more acquisitions in the healthcare and personal care space, said Agarwal, adding that there are not many good opportunities available in the market right now.
Like Emami, other consumer goods makers are keen to acquire brands and businesses, but concerns over valuations are proving to be a deterrent.
“The few deals which were completed in India in the recent past indicate that valuations are extremely stretched. So it offers very little value for the acquirer, but there could be exceptions. Valuations are comparatively better in the overseas markets,” said P.D. Narang, group director at Dabur India Ltd.
According to him, Dabur is also actively looking at acquisitions, both in India and abroad.
Several consumer and retail brands came to the market last year to raise funds from PE investors. They included Balaji Wafers Pvt. Ltd, JK Helene Curtis Ltd (part of Raymond Group which owns the Park Avenue brand), Cremica Food Industries Ltd, and apparel brands such as Soch and Mufti. None of these deals have been closed yet.
For instance, Rajkot-based Balaji Wafers has been in talks with various PE investors and multinational firms such as PepsiCo Indiaand Kellogg Co. to raise money, but couldn’t close a deal because of a valuation mismatch, according to media reports.
Manpasand Beverages Ltd, the Vadodara-based maker of mango-based juice drink Mango Sip, failed to raise a second round of funding from PE firms and launched an initial public offering recently.
“In our view, consumer deals generate serious interest from PE investors, but few closures are achieved. Not too many consumer situations are being made available for M&A deals as good consumer businesses are cash flow-growing businesses, which shareholders like to hold,” said Ajay Garg, managing director at investment bank Equirus Capital Pvt. Ltd.
In the medium term, however, deals could pick up, says Godrej’s Gambhir.
“In the medium term, there will be more mergers and acquisitions as those companies which have survived one downturn will not survive another and they will look to sell out. Smart promoters will realize that the market is consolidating, it is getting more competitive and hence they will be more willing to sell,” he said.
The article appeared in the Financial Express. The article can be found here.