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'Deals Likely Despite Higher Valuations'

17 June, 2010

After a hiatus, investment banks are back to becoming active. Ambit Corporate Finance, a leading I-Bank which recently closed the Hitachi-Flyjac deal, says it has a healthy pipeline. Sanjay Sakhuja, CEO & Managing Director, Ambit Corporate Finance, who has been at the firm since 2003, was involved with some of its successful deals such as the HDFC-CBoP merger, IDFC’s acquisition of Standard Chartered Mutual Fund, BNP-Srei joint venture, CBOP-LKB merger, BNP-Geojit transaction, Centurion Bank-Bank of Punjab merger and sale of the AMP Sanmar Life Insurance business to Reliance. Sakhuja–who was earlier managing director at Lazard India, partner at Arthur Andersen and a vice-president at Citibank N.A—talks about defining trends in the M&A scape. Excerpts:-

Ambit closed a Rs 250-crore deal just last month. How do you evaluate M&A deal flow for 2010?

It is well known that there was a marked slowdown in M&A deals in the marketplace commencing mid-2008 and for almost the entire 2009. Despite this, we have managed to close several transactions including the Rs 1,700-crore sale of Dempo’s mining assets to Sesa Goa. In the last six months, we have seen a distinct pick-up in enquiries and actual traction in the deals we are working on. We are very optimistic about the current fiscal.

What are the challenges in the Indian M&A space? 

Valuation is a challenge. Also, the market is volatile and unpredictable. But, several Indian companies have raised significant capital in the recent past. They have de-leveraged their balance sheets, and, in a sense, today have the appetite for inorganic growth. Debt markets too are benign and this helps. One does find that deals are more likely to happen during such times despite higher valuations.

Deals such as Daiichi-Ranbaxy and Abbott-Piramal raised eyebrows as far as the valuations are concerned. Are MNCs ready to buy Indian assets at a higher price?

The Abbott-Piramal deal was aggressively priced, both in terms of revenue multiple and EBIDTA multiple. But, perhaps Abbot was attracted by the expected growth rate in the Indian market. India has a GDP growth expectation of 8-10% CAGR per annum. Combine that with the fact that the healthcare sector in the country is highly underpenetrated. As incomes grow, spending habits change and in countries like India, it is expected that once food and shelter are taken care of, people will focus on their health. Hence, what seems expensive today, may seem quite reasonably priced if the growth assumptions come true. Also, globally, interest rates and consequently costs of capital are very low, again making it easier to justify high valuations. And finally, how many targets are there in India, which have a sizeable market share, and are also willing to sell-out?

The shopping spree of Indian corporates continues in 2010. What is your assessment of the potential deal targets globally?

A number of targets are available globally. There are many assets owned by private equity firms, who want to make an exit. Globally, companies who want to be acquired are attracted both by valuation and, in many cases, by the superior management capability of the buyer. The one positive learning of the acquisitions made by Indian companies is that Indian managers are quite capable of operationally running global companies. Tata-Corus, JLR, and Hindalco-Novelis are good examples.

Which are the new countries where Indian firms are exploring inorganic growth potential?

It depends on the sector. For example, South Amercian countries such as Mexico, Chile and Argentina, East Asian countries like Indonesia, and South Africa are attractive for Indian FMCG companies as they are similar to our domestic markets in terms of consumer behaviour. Indian companies can transfer their capabilities to launch low cost products very effectively in those markets. Countries such as the Africas, Australia, Canada and Indonesia may, on the other hand, be very attractive for companies seeking to acquire natural resources.

What about outbound deals that have not worked? Does that underscore the need for due diligence further?

Indian companies have been able to exhibit a high degree of operational success in the acquisitions they have made (Tata Corus etc). There may also have been some failures. Due diligence is important but ultimately the decision on when to buy and what to pay is taken from the gut. Beyond a point, no amount of financial modelling or due diligence will protect you.

Which are the sectors where deal-making is on an ascent? 

Any sector related to consumers such as FMCG will have potential in the future. Also, healthcare and related areas like hospitals, clinical trials, contract manufacturing has potential. As far as we are concerned, we have deals in financial services, media, logistics, healthcare and real estate in the pipeline.


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'Deals Likely Despite Higher Valuations'

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