The year of deals

Private equity (PE) deals accelerated a bit in 2019 touching $37 billion compared to $36 billion in 2018, says sector watcher Venture Intelligence. Add venture capital investments to PE funding and 2019 hit an all-time high of $48 billion, according to management consultant EY. Mergers and acquisitions (M&As) reverted to “near normal” levels — a shade over $52 billion — in 2019 after a record 2018, according to leading law firm Baker McKenzie. The Insolvency and Bankruptcy Board of India (IBBI) reported an average recovery rate at over 43 per cent against claims of Rs 3.52 trillion till 2019 end. And funding of startups at $7.9 billion was at a five-year high in 2019, according to the Indian Private Equity and Venture Capital Association (IVCA) and EY.

Going by predictions, the pace of deal making is likely to slow down this year. IBBI data shows resolution under the Insolvency and Bankruptcy Code or IBC witnessed a big fall in the quarter ending December 2019 as financial creditors realised just 12 per cent of their claims, against 34 per cent in the preceding quarter, with expectation of this trend to continue, as major cases get resolved, there are few takers left for assets of smaller firms. Though McKenzie expects M&As to be resilient in 2020, it predicts deals at just around $44 billion, with the rev up coming only next year. Number of M&As, too, is expected to dip below 600 this year (589), from 665 in 2019 as per management consultants Bain & Company.

One can throw more data, but you get the drift. All are predicting that 2020 will be a slow year as far as deal makers are concerned. But reading the tea leaves gives one a somewhat different picture.

Just witness the spate of deal activity in the first month or so of this year, within and without the IBC. Over a dozen players — from some Indian conglomerates not present in financial services like the Adani and Welspun groups to PE firms such as Warburg, KKR and Oaktree — are bidding to buy the country’s first financial firm undergoing bankruptcy process in Dewan Housing Finance Ltd. (DHFL). DHFL has over Rs 85,000 crore of debt, and creditors’ preference is to sell the firm as a whole, going concern rather than hawking the assets piecemeal. Then at IBC again there is Cerberus and SSG Capital racing to pick Altico Capital India and US-based Deccan Value Investors making Rs 2,700 crore reported bid for Amtek Auto.

Outside the IBC, there is again a flurry of deal activity. The Hinduja Group and PE firm Cerberus Capital Manage-ment are reported to be close to placing a joint bid for the Yes Bank stake.

France’s Groupe ADP has bought 49 per cent in GMR Airports for Rs 10,780 crore. Axis Bank is reportedly set to pick up 20 per cent stake in Max Life Insurance. JSW Energy just bought GMR Energy’s Odisha power plant for Rs 5,321 crore. Canadian investor CPPIB is looking at buying an additional 24 per cent stake in renewable energy company ReNew Power from Goldman Sachs. Dr Reddy’s has snapped up Wockhardt’s India formulations business for Rs 1,850 crore. And all of government-owned Air India is up for sale, besides a chunk of oil retailer Bharat Petroleum Corpo-ration and Container Corporation of India.

Notice that most of the deals mentioned above are buyouts, near-buyouts or rescue deals where the buyer will increasingly play a major role going forward. The IVCA and EY report also brought out the fact that buyouts have emerged as the largest PE and VC deal category for the first time in 2019 — ahead of growth capital — accounting for over a third of deal value. In fact, buyout value in 2019 and 2018 combined outstrips the cumulative value for the preceding 12 years, from 2006 to 2017.

And 2020 is as good a time for buyouts as any, what with government out to hawk family silver, India Inc. in spring cleaning mood, the IBC extended to financial firms. What may also help is steady improvement in Indian firms’ health — from return on equity to interest coverage ratio — and attractive valuations.

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