Will Avery says that John McCain’s choice of Sarah Palin as a running mate in the US presidential election is what is known as a ‘Hail Mary pass’ – an American football term used to describe a long forward pass with little chance of success.
An American and a senior adviser at Elara Capital – an investment bank and mid-market specialist advising on inbound and outbound Indian deal flow – Avery spends most of his time in talks with ambitious UK companies looking to push forward into India. For medium-sized businesses with little experience of the sub-continent, dealmaking can seem a daunting prospect, and like politics, the odds can often be stacked heavily against them.
“UK companies are after growth, and they know that India is a huge growth market, but difficult to crack as an outsider. There are certain restrictions on foreign direct investment; ceilings on the percentages that a foreign entity can hold in an Indian company, which varies by sector,” notes Avery.
He adds: “The Indian market is inward looking and favours domestic suppliers. I think the best way for a UK company to monetise its technology or its expertise in the Indian market is to hook up with a local player. We are seeing a number of joint venture deals at the moment.”
UK-India partnerships are thriving, according to the UK India Business Council, as many UK companies consider it “business critical” to have joint ventures in India. The bilateral trade body claims that this trend is mirrored by Indian corporates, who are among the largest investors in the UK.
Avery says that UK companies are looking for access to Indian markets, such as the high-end construction industry and the infrastructure sector, where domestic expertise can falter.
Raj Bhatt, Elara Capital founder and chairman, observes: “You don’t need a joint venture to create a back office in India, but in order to create something new for the Indian market they’re necessary because it’s difficult to understand the Indian market overnight.”
The Asian Development Bank recently forecast a dip in India’s phenomenal growth rate to 7.4 per cent this year, with a further drop to seven per cent expected in 2009, compared with eight per cent and 8.5 per cent respectively in its April forecast. India remains one of the world’s fastest-growing economies, and its near eight per cent growth rate continues to attract vast amounts of foreign investment.
For the most part, UK acquirers target India to cut costs or to establish a vital base through which to distribute consumer products within the domestic market Nevertheless, sky-high valuations of Indian companies have tended to be a blot on UK expansion plans. Avery explains: “The Indian growth story was known by the markets, and there was a lot of foreign investment flowing into India. Vendor expectations were high.
“There were very few sellers as family businesses wanted to hold on to their assets, so everybody was a buyer, but I think that’s changing. There are smaller firms in India that are more open to selling, or at least more open to a joint venture or giving a stake to a foreign company than they used to be.”
Bhatt tends to agree that a major change is under way in India as families sell up and relinquish their hold on industry, seen recently with Indian pharmaceutical giant Ranbaxy Laboratories selling up to Japanese drug-maker Daiichi Sankyo. The Singh family’s entire stake in the business was bought by the Japanese drug firm in a deal worth up to $4.6 billion (£2.9 billion).
“Indian business was dominated by a few families, but over the past 15 years these families have been disintegrating and first-generation entrepreneurs are heading up larger companies, particularly in the technology and media spaces. The majority of companies in these areas are run by professionals,” says Bhatt.
The total value of Indian acquisitions in the UK in the first six months of the year was £1.52 billion, compared with £930 million in the US during the same period, according to professional services firm Grant Thornton. However, the US still holds the top M&A slot by volume, with 41 US businesses acquired, compared with 20 UK companies over the same period.
Compared with their global peers, Indian corporates are cash rich and looking to make inroads into new markets. Nevertheless, the team has seen deal cycles lengthen as Indian ventures show more prudence and in some cases put their overseas expansion plans on hold.
Bhaskar Majumdar, Elara MD, says: “The closing cycle of a deal is much longer than it was six months ago. I believe this is due to caution and the macroeconomic picture. People are just doing a wait-and-watch, carrying on their day-to-day operations. The focus will be on companies that have stronger balance sheets and don’t need to bring leverage into the equation.”
According to Majumdar, the rationale for UK acquisitions has been to make the target company more profitable by lowering the cost base. Generally, this tended to be done by sending work back to India. He insists that the market has since matured and acquisition drivers these days appear to be more market orientated.
“Entrepreneurs are looking at increasing their market share as well as acquiring certain technologies to take back to the home market in India, which has higher growth expectations. They are also looking to gain a pool of management and expertise, which is lacking in India.”
The team recently advised an Indian power equipment manufacturer on its UK acquisition of AEI Cables, a unit of TT Electronics. Paramount Communications bought AEI for some $26.5 million in cash, which will be financed through debt and the proceeds of a convertible bonds issue.
In a restructuring move, TT Electronics disposed of the non-core business and AEI became part of India’s largest cable manufacturer. Paramount chairman Sanjay Aggarwal told the press: “The acquisition gives Paramount access to world-class product development and technical know-how, especially in the defence sector.” Avery explains: “In Europe, the power equipment sector is a mature, low-margin and unsexy industry. AEI made cables for industry and Paramount saw growth in this area.
The acquirer wanted to take back the brands and technology to the home market in order to leapfrog the competition. The deal also gave Paramount access to new markets in Europe, the Middle East and Africa.”
As a result of major investment in the developing nation’s power infrastructure, Indian companies are emerging as highly acquisitive entities in the energy sector, looking for equipment and technology to support this growth. “The technology is relatively less advanced in India compared with what the West can offer,” says Avery.
Earlier in the year, Majumdar and Avery advised Marksans Pharma on its UK acquisition of Bell, Sons & Co, a maker of over-the-counter pharmaceutical products that has been in operation for 161 years.
The terms of the deal have not been revealed, but the transaction is set to enlarge the Marksans portfolio of products, giving it access to 34 product licences.
In an announcement to the Bombay Stock Exchange, Marksans commented: “The acquisition is in line with Marksans’ global strategy, and the company now has a presence in two major countries – the UK and Australia – for which it holds manufacturing approvals.”
The deal will enable the Indian drug-maker to channel its own products through Bell, Sons & Co’s vast domestic and international distribution network, which exports products to more then 20 countries.
“The pharmaceutical space is an area that is seeing a lot of activity, particularly within generics,” notes Avery. “India has a large generics industry, and this is a typical deal as Indian corporates are looking for brands and market access.
“India has rapidly gone from being a mom-and-pop model with a few family-owned businesses dominating industry to a large number of small and medium-sized companies that have access to capital and global ambitions.”
Deals at a glance:
Acquirer: Paramount Communications
Sector: Power equipment
Target: AEI Cables
Value: $26.5 million in cash – debt and convertible bonds
Advisers: Elara Capital and Cavendish Corporate Finance
Acquirer: Marksans Pharma
Target: Bell, Sons & Co
Advisers: Elara Capital and
PKF Corporate Finance