India has been a slog for Wilbur L Ross Jr. The New York investor, who likes to buy downtrodden assets and then cut away every inch of fat to rehabilitate them, opened an office in Mumbai two years ago to hunt for deals. But with the country's economy expanding fast and the Bombay Stock Exchange soaring, few were interested in selling at the kinds of prices Ross was willing to pay. "We were bidding, but losing, losing, losing," Ross says, while rivals "were paying very big prices."
Now, with its stock market in reverse and merger activity slowing, India may finally be ready for Ross. On Aug. 11 he took an $80 million stake in SpiceJet, an Indian discount airline. And he has a $300 million fund ready for other deals in the country.
From a spartan office in Mumbai - a bouquet of dyed turquoise orchids on the reception desk is the only aesthetic touch - Ross' team is exploring investments in sugar, cement, real estate, and more. "Our mandate is to look at any situation where . . . there is some degree of distress and there's potential for consolidation," says Ranjeet Nabha, CEO of Ross' India operations.
It's part of Ross' global strategy. He made his fortune stitching together the remnants of troubled U.S. industries such as steel, coal, and textiles. His playbook involved gobbling up assets on the cheap and combining them into a lower-cost operator that he later could sell off at a hefty profit. His most famous deal: the 2004 sale of his steel business to Lakshmi N. Mittal for $4.5 billion, at a profit of more than $2 billion in just two years. His philosophy hasn't changed, but his stomping ground has gotten a whole lot bigger. Today, two-thirds of WL Ross & Co.'s earnings come from outside the US.
So far, Ross seems to be making his way as a citizen of the wider business world. Investments in developing countries have fared well, he says. Returns nearly equal those earned on more established terrain, about 30 per cent per year, according to sources close to the firm. Ross has already made investments in more than 20 countries - including Vietnam, China, Brazil, Mexico, and South Africa - and he now manages close to $8 billion on behalf of US state pension funds like CalPERS, sovereign wealth funds, and Britain's university pension fund, among others.
To date, Ross has followed two fundamental strategies internationally. At first he picked up far-flung factories of troubled industries he knew. Ross initially assembled his auto components business from US and European divisions of Collins & Aikman and Lear, but today the group operates in 17 countries.
His second play has been to mimic the moves of any cost-conscious U.S. or European manufacturer shifting work to low-wage countries. His textile group, for example, has built factories in China and is in a joint venture in Vietnam, and the auto parts operation has 75 plants around the world.
With SpiceJet, Ross is further tweaking the model with an eye toward consolidating an industry that is almost entirely domestic. India's vast size and lousy roads will keep air traffic growing two to three times as fast as the broader economy, he calculates, and the country's low incomes should put discounters such as SpiceJet in a strong position. The big payoff, he says, will come when he can merge SpiceJet with other struggling airlines. "There are about a half-dozen of these low-cost carriers in India, all losing money," says Ross. "There's room for maybe two." He says he has talked with SpiceJet rivals, though he won't say which ones.
By the time Ross got involved in SpiceJet this summer, the airline had racked up $20 million in unpaid airport fees and plane leases. High fuel prices combined with an industrywide fare war left SpiceJet in need of fast cash. Management was making short-term moves just to raise money, including an offer of half off any ticket purchased 15 days in advance.
In the first quarter, SpiceJet reported a $23 million loss on revenue of $104 million.
Damaged goods
Ross moved quickly, closing the SpiceJet deal in three weeks. He got in on good terms, buying debt convertible to stock at a 20 per cent discount from the level seen just before the sale, and a quarter the January price. Ross' investment, plus backing from Goldman Sachs and Dubai investment group Istithmar World Capital, has provided SpiceJet with enough cash to cover costs for the next 24 months, Ross says.
The airline's CEO has been replaced, the advance-purchase half-price deal is over, and Ross and his India chief, Nabha, are looking to join the board. With SpiceJet, "Ross has a unique opportunity to prove that his credentials for turnaround investments are equally powerful in Asia," says Rajeev Gupta, managing director of private equity rival Carlyle Group's Indian operations.
In these economic times, Ross may find growing competition in India. As credit dries up in Europe and the US, private equity players "have really turned to emerging markets," says Paul Schnell, a partner in law firm Skadden, Arps, Slate, Meagher & Flom who advises private equity firms. Many investors try to boost their returns by piling on debt, which is difficult in India, where there's not much of a market in junk bonds and leveraged loans. For Ross, that may not be an issue, since he prefers to buy ultracheap assets and nurture them without taking on debt.
To help find the damaged goods he loves, Ross has hired a former official of an Indian company modeled on Resolution Trust Corp., which the US set up to deal with failing thrift assets in the 1980s. India's version, Arcil, is working through billions of dollars in bad loans made by Indian banks in the '90s.
In Febuary 2007, Ross became the first foreigner to buy a company - a textile maker - from Arcil. "There are many sick companies in India, and many industries with the potential for consolidation," says Deepak S Parekh, chairman of HDFC, India's largest mortgage company and an adviser to Ross. "That means many opportunities for Wilbur."
