14 Apr 11 Indian M&A falls in Q1 2011, but prospects still bright

The first quarter of 2011 saw a decline of more than 60% in the number of M&A deals as compared to the earlier quarter (Q4 2010) as high valuations and increasing uncertainty about macroeconomic factors such as fiscal deficit, interest rates and inflation made corporates watchful.

As per ISI emerging markets database, only 40 M&A deals were announced in the first quarter of 2011 (Jan-Mar) as compared to 80 in Q1 2010 and 79 in Q1 2009. But net deal value (excluding undisclosed deal values) amounted to USD 9.4bn in Q1 2011 while it was USD 6.3bn in Q1 2010 and USD 5.6bn in Q1 2009. This was mainly because of the USD 7.2bn Reliance-BP deal which was announced in Feb 2011.

Out of these, 17 were domestic deals amounting to a deal value of USD 358m, 8 were outbound deals where Indian companies acquired a foreign target (deal value USD 362m) while 15 inbound deals saw Indian companies being acquired by foreign firms (deal value USD 8.6bn).

The biggest deal of the quarter was UK’s BP buying a 30% stake in Reliance Industries’ 23 oil and gas blocks, including the producing KG-D6 gas field off the east coast for USD 7.2bn. Other big deals include British consumer goods firm Reckitt Benckiser agreeing to buy Paras Pharmaceuticals for about USD 726m, International Paper agreeing to buy 53.5% of Andhra Pradesh Paper Mills (APPM) for approximately USD 257m in cash and Essar Oil acquiring Shell’s Stanlow refinery in the UK for USD 350m.

Sector wise breakup of the M&A deals for the Q1 2011 shows that healthcare sector continues to be the biggest contributor as it accounted for 25% of the total deal value while the Banking, Financial Services and Insurance (BFSI) sector accounted for 19%. Manufacturing sector was the third highest contributor as it contributed 14% in deal value.

As cash-rich Indian companies continue to hunt for strategic bargains globally, despite the slow start, it is expected that 2011 will see a high volume of M&A activity in India. In fact India and China are expected to be the most active buyers in 2011, as attractive valuations drive deals globally. We are already seeing Indian (Aditya Birla group) and Chinese companies (Yanzhou Coal Mining Co) trying to bid for the USD 3.5bn sale of Australian coal miner, Whitehaven Coal Ltd.

Telecom Minister Kapil Sibal has been stressing on the need to have liberal M&A guidelines in telecom, which will facilitate smooth passage for M&A deals in the sector. The Indian Government has further unveiled plans to spend USD 1 trillion to improve infrastructure such as power, roads and rail networks. I think this will considerably pace up India’s demand for metals and minerals in the future. We could see a particular focus on Indian public sector companies targeting global oil assets as well as domestic companies looking to acquire iron ore and coal for their growing steel and power operations. Thus main sectors where I expect major M&A activity in 2011 are oil, gas, coal and other natural resources which will help fuel India’s industrial growth.

Notes: Includes deals announced in the period of Jan-Mar 2011. Includes joint ventures & undisclosed deals

Source: ISI Emerging Markets Database