Record year for PE while M&A activity softens
Mumbai, 7 March 2016
- Highest annual investments for PE recorded, with 767 transactions worth US$19.6 billion
- M&A activity in 2015 softens, registers increase in volume but decline in value
- Value driven by outbound transactions, with oil & gas and pharma most active sectors
India’s M&A market saw PE activity recording its best year ever in terms of high volume and value of investments in 2015 even as M&A activity was tepid and declined in total disclosed deal value, says EY’s Transactions 2016, its annual analysis of the M&A activity in India. This was due to weak domestic activity which had an absence of mega transactions which were quite prominent in 2014. At the same time, there were fewer big-ticket divestments by debt-ridden companies as compared to 2014.
Analysing the deal scenario, EY report highlights that a total of 930 M&A transactions were announced during the year 2015, representing a 7% increase in deal volume as compared to 2014. The aggregate disclosed transactions value for the year was US$26.3 billion, 11% lower than 2014.
Record year for Private Equity
2015 reported a total of 767 transactions amounting to US$19.6 billion in investments, making it the best year ever in terms of high value and volume of investments. This was a 68% increase in announced transactions value from 2014 which stood at US$11.7 billion across 469 transactions and was 10% more than the previous record year of 2007. This heightened activity was driven by significant interest in the e-commerce sector, an increase in transaction size and a marked rise in early-stage activity.
Amit Khandelwal, Partner and National Leader, Transaction Advisory Services, EY, says, “While domestic M&A activity was muted, the fact that PE activity recorded its best ever performance has been an extremely positive highlight for 2015. Despite uncertainties created by the global political and economic environment and a soft commodities market, India’s positive outlook on the growth front will drive momentum for M&A activity through this year.”
Restructuring takes center stage in domestic M&A activity
In 2015, 513 domestic transactions were announced, at an aggregate disclosed value of US$10.9 billion, accounting for 55% of the total transactions volume and 41% of value.
According to the EY report, Indian companies’ focus on resource optimization and cost efficiency helped the restructuring transactions (mergers and stake/assets transfers within group companies, spin-offs and share repurchases) emerge as a major driver of domestic M&A activity during the year. The two largest transactions recorded during the year including Vedanta’s US$2.2 billion mega-merger with Cairn India, and a second one being the Aditya Birla Group’s US$818 million merger of its branded apparels businesses Pantaloons Fashion and Madura Garments, illustrate this focus.
Outbound acquisitions drive cross-border transactions and value
417 cross-border transactions with a cumulative disclosed transactions value of US$15.4 billion were recorded during the year, representing an 11% y-o-y increase in deal volume and 17% increase in total disclosed transactions value. This positive performance owed itself to strong outbound activity, which registered a 123% y-o-y increase in disclosed transactions value and 23% increase in volume. In absolute terms, outbound acquisitions stood at 145 transactions with a disclosed value of US$5.3 billon. The oil & gas and pharmaceuticals sectors witnessed big ticket outbound transactions as the country’s increased focus on energy security and Indian pharma majors’ intent on expanding scale and market reach pushed players in these sectors to look for opportunities overseas.
On the inbound front, the year closed on a steady note. Global investors adopted a cautious approach due to a subdued global economic environment and a slump on the commodities front. In 2015, we saw a total of 272 inbound transactions as compared to 259 in 2014. On the value front, the action was relatively muted at US$10.2 billion, a 7% decline from US$10.9 billion in 2014. The financial services sector witnessed the majority of the inbound action, while also leading in value terms. Other sectors that witnessed significant activity include technology and infrastructure.
The EY report also highlights that companies from the US continued to remain the most active in cross border deals involving Indian companies and were involved in a total of 120 transactions collectively worth more than US$5.5 billion. At the same time, Japan was the second most active cross-border partner with Japanese companies involved in a total of 36 cross-border deals with Indian companies.
E-commerce drove activity across sectors
The e-commerce market in India has demonstrated significant traction, growing at a CAGR of 50% over the last five years. This strong growth along with rapidly increasing internet population is forcing companies across industries to establish an online presence with a view to address and survive growing competition. With this trend impacting sectors equitably, companies are adopting the inorganic route to swiftly build capabilities on the digital front. Key trends include:
- Traditional retailers foray into the online space reflects this trend. Select examples include — the Aditya Birla Group’s entry into e-retail through its online fashion store, www.abof.com; the Mahindra Group’s foray into e-commerce with its online marketplace M2ALL.com
- E-commerce companies acquiring peers to expand scale and market share. Examples include the acquisition of TaxiForSure by Ola Cabs and acquisition of Mygreenbox, an online grocery delivery service, by Grofers.
- E-commerce players acquiring tech start-ups to build capabilities, especially in the mobility domain. Examples — acquisition of Letsgomo Labs and Martmobi Technologies by Snapdeal, and acquisition of NexTable and Maple Graph by Zomato.
- Companies pursuing acquisitions to secure talent. Such acquisitions include — acquisition of Appiterate and AdlQuity by Flipkart and acquisition of Reduce Data Inc. by Snapdeal.
M&A activity to turn the corner in 2016
Although 2015 was a tepid year for M&A activity in India, it is expected to revive in 2016. While ongoing consolidation in e-commerce, retail and pharmaceuticals sectors will likely gain further traction, the expected comeback of de-leveraging divestments, in sectors such as power, cement and real estate, should push domestic deal activity back to 2014 levels.
On the cross-border front, inbound activity is expected to remain steady due to the cautious approach of global businesses, though we expect to see increased activity from Japan. Furthermore, outbound investments will continue to be led by oil & gas and pharmaceuticals companies through 2016.
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