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M&A: Deal frenzy shows few signs of cooling off

By Joe Leahy in Mumbai
January 25, 2008 13:14 IST
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As investment bankers in India returned to their offices in India's financial capital, Mumbai, after Christmas and the New Year, they must have suffered from deja vu.

The New Year started as the old one ended - with a frenzy of deal-making by an Indian corporate sector hooked on exponential growth, capital-raising and overseas acquisitions.

In the first few days of the New Year, the Tata group announced it had been named as the front-runner in bidding for the $2bn takeover of Ford's Jaguar and Land Rover marques.

This was followed within days by the launch of India's largest initial public offering, the $3bn listing of Reliance Power, which sold out within seconds of opening on January 15.

Bankers are bracing themselves for another strong year in 2008, even given recent volatility in global markets.

"I don't think there are going to be fewer deals, if anything there will probably be more," says Pramit Jhaveri, head of India investment banking at Citigroup. "The pipeline looks very, very busy."

The figures speak for themselves. In 2007, the Indian corporate sector was involved in $60.1bn worth of mergers and acquisitions, up 109 per cent on 2006, which was itself a record year, according to Dealogic.

The trend was led by Vodafone's $11bn takeover of Hong Kong-based Hutchison's Indian mobile unit, and Tata Steel's pound 6.7bn acquisition of Anglo-Dutch rival Corus.

Equity issuance was another highlight, with companies selling $31.5bn of shares, up 56 per cent from a year earlier.

At the vanguard of this was DLF, India's biggest developer, which held the country's largest IPO to date, raising $2.5bn.

Indian companies also became more active in the debt markets as they moved to fund acquisitions and expansion plans. Loan volumes rose 43 per cent to $35.3bn while debt issuance was up 52 per cent to $21.7bn.

The question on analysts' minds now is, where next for corporate India?

Again, the acquisitive Tata group, one of the country's largest conglomerates, is leading the way by using takeovers to move up the value chain.

If Tata is able successfully to integrate Jaguar and Land Rover - a big "if" given Jaguar is still loss-making - it will make a name for itself not only in the global automotive industry but also in luxury and premium consumer products.

Other Indian groups are starting to pursue a similar strategy, with DLF buying the ultra-luxury hotel chain, Aman Resorts, and the UB Group, controlled by Indian liquor baron Vijay Mallya, buying the Spyker Formula One racing team and renaming it Force India.

Bankers will also be focusing this year on Reliance Industries, controlled by billionaire businessman Mukesh Ambani, and the group headed by his brother, Anil, known as Reliance Anil Dhirubhai Ambani Group.

The two brothers, India's richest men, have yet to make a ground-breaking overseas foray. But there are plenty of potential opportunities.

Mukesh Ambani's Reliance Industries, which has interests in oil, petrochemicals and mass retailing, was last year seen eyeing units of Dow Chemicals and France's Carrefour.

Anil Ambani's ADAG has been largely absent from the global M&A rumour mill but few believe he will be content to remain a bystander while his corporate peers in India turn their groups into multinationals.

On the capital-raising side, analysts are predicting an unprecedented investment spree in infrastructure this year.

The IPO of , controlled by Anil Ambani, is just the tip of the iceberg, with Indian companies expected to launch at least $7bn of infrastructure-related offerings in the coming months.

"Indian companies need a lot of growth capital for capital expenditure," says Manisha Girotra, chairperson of UBS in India. "Infrastructure is the largest sector, but across manufacturing everyone's raising capital."

Some Indian infrastructure companies are also beginning to look offshore for acquisitions. GMR Infrastructure, a home-grown construction company, has bid for a government-controlled power plant in Singapore.

But for all their enthusiasm, some wonder whether Indian executives are getting carried away in their rush to go overseas. Deals like GMR's interest in Singapore do not seem to make sense given the huge opportunities in its home market.

"I think it's beginning to become a kind of fashion statement for some companies to buy overseas," says one banker in Mumbai.

Indian managements, never very deep, are becoming seriously stretched as they integrate complex acquisitions in different time zones while managing their businesses in a domestic marketunder increasing attack from foreign competition.

Indian corporates will also not be able to escape global factors, such as the impact of the sub-prime mortgage crisis on the availability of debt to fund acquisitions.

Ms Girotra believes the increased difficulty in obtaining leverage for acquisitions will favour the larger Indian companies, which have adequate resources of their own for large global forays.

Indian companies may also be able to offset cautious global debt markets by raising more money at home.

"The theme this year is going to be equity issuance," says Vedika Bhandarkar, head of investment banking at JP Morgan. "With the market at these levels, there seems to be a rush to get equity deals done across all sectors, from infrastructure, to financial services, manufacturing and real estate."

The burning ambition of the Tata group

When executives from India's Tata group discuss globalisation, one detects an almost evangelical zeal.

RK Krishna Kumar - who as a director of the conglomerate's holding company, Tata Sons, has helped oversee many of its most successful foreign acquisitions - is no exception.

Discussing the group's latest overseas foray, the proposed acquisition of Ford's UK-based Jaguar and Land Rover marques, Mr Kumar says all large companies need a view on international expansion.

"I'm not seeing a difference between developed and developing nations," says Mr Kumar. "I think the constructs that existed in the last few decades may no longer hold in the next few years."

In the past eight years, the 140-year-old Tata group has risen beyond its roots as a domestic stalwart to become undisputed leader of the country's push overseas.

Last year, the conglomerate agreed a pound 6.7bn takeover of Anglo-Dutch rival Corus. It is now capturing headlines again with a bid for Jaguar and Land Rover valued at about $2bn.

These acquisitions are expected to tilt the company's revenues for the first time in favour of overseas operations. The group's standalone revenue is about $29bn. Once consolidated, Corus will add £9.7bn.

None of this would have been possible without Tata's sprawling base in India, where it has 98 operating companies and 289,000 staff, more than any other Indian private-sector company. Three businesses account for most of its sales and profits: Tata Steel, which bought Corus, Tata Consultancy Services, the IT outsourcing unit, and Tata Motors, which is bidding for Jaguar and Land Rover.

Founded by Jamsetji Tata in the mid-19th century, the group is controlled by three trusts and is headed by a family member - Ratan Tata. The chairman of the group is still a dynamic presence at 70 and the driving force behind the group's global ambitions.

The international expansion drive began in earnest in 2000, when Tata Tea, the group's beverage outfit, bought Britain's Tetley for pound 271m. Since then, virtually every arm of the group has been active - TCS has bought IT concerns from Chile to the UK. Tata Tea has forayed into the US and , and Tata Motors has bought Daewoo's truck unit in Korea.

The group's Indian Hotels, which operates under the brand Taj, has bought hotels in Sydney, New York and other countries.

The strategy has generally been to marry low-cost production in emerging economies such as India with the high-margin markets of the west. Tata Steel, for instance, has access to cheap supplies of government-allocated iron ore, which it can ship to operations in south-east Asia and in time to Corus' markets in Europe.

The group is beginning to put a greater emphasis on moving up the value chain through branding.

Mr Kumar sees building global brands as a natural evolutionary course.

"The Japanese started this way, so did the Koreans, and there's really no reason to ask whether that trajectory is the right one - it's a strategic necessity for companies and countries as they evolve."

But just as Tata executives can display an evangelical zeal about globalisation, they also tend to dismiss the risks.

Spurred on by a fierce bidding war for Corus, Tata paid what many saw as an inflated price for a company that until recently struggled to stay out of out the red and whose margins are sub-par compared with Tata's own steel operations.

And while Land Rover is profitable, analysts question the wisdom of getting involved with the lossmaking Jaguar.

There are also concerns over senior management spreading itself too thinly. Tata faces challenges in its home market, where foreign companies are entering the automotive and hotel sectors, and costs are rising due to salary inflation and a stronger rupee.
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Joe Leahy in Mumbai
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