India Inc's overseas buys touch $6 bn

Monday's announcement by Delhi-based Ballarpur Industries Ltd that it was acquiring Malaysian paper and pulp facility Sabah Forest Industries for $261 million has pushed up the total value of overseas acquisitions by Indian companies this year to over $6 billion involving over 50 deals. The figure last year was $4.3 billion for 136 transactions.

While Mahindra and Mahindra set the ball rolling with its buyout of the UK's Stokes Forging for an undisclosed amount in the first week of the year, New Delhi-based Ranbaxy Laboratories led the way in the number of buys with its three back-to-back acquisitions in March.

The biggest of them (Terapia SA of Romania) was valued at $324 million and this was after adding Senetek Plc and Allen SpA, a division of GlaxoSmithKline in Italy, to its kitty.

Jindal Steel and Power Ltd's $2.3 billion investment in setting up an integrated steel unit in Bolivia is the highest in sheer value terms followed by ONGC Videsh Ltd's 15 per cent buy of Petrobras' BC-10 block in offshore Brazil valued at $1.4 billion.

Next in value terms was Dr Reddy's buyout of Germany's Betapharm for $572 million in February and Suzlon Energy's acquisition of Belgium's Hansen Transmissions International NV for $565 million the following month.

Subex Systems' buyout of UK's Azure Solutions for $140 million and United Phosphorus Ltd's (through its Mauritius subsidiary) acquisition of Advanta Netherlands Holding BV at $119 million are the other notable acquisitions so far this year.

The largest proportion of outbound acquisition targets in numerical terms continued to be Europe, which accounted for over half the deals, while South America took the lead in value terms. Industry analysts reckon that with the European economy growing at a snail's pace, many of its smaller and medium companies were natural targets for acquisition.

"European companies come with both the required technology and a readymade clientele making them the most attractive option for a takeover. In a few cases, after buying the European company, the Indian acquirer offshores the technology back to India and retains the clientele while managing to lower production costs," said Vikesh Mehta, partner (advisory services), Grant Thornton India.

Financing these buyouts is no longer a big deal for Indian companies, who have many readymade debt and equity options at their disposal, with borrowings from international institutional equity buyers among the most attractive modes even as internal accruals are generally the least favoured mode.

"There are plenty of avenues for acquisition finance for Indian companies today, both in the debt and equity modes. Banks and institutions are generally happy to do acquisition financing and if the deal is likely to be good, they see a lot of benefits going forward," PricewaterhouseCoopers Executive Director Timmy Kandhari said.

"Today, even Indian banks are coming forward to fund these acquisitions if the balance sheets of the Indian company are healthy," he added.

Foreign lenders look at factors like the performance of the Indian company and the ability of the company to be acquired to gel with Indian management. The increasingly successful India story also tips the balance in their favour.

Among various options available to companies interested in overseas acquisitions are the IPO/QIP (qualified institutional purchase) route, part stock-part cash transactions, leverage buyouts and setting up a fully-owned subsidiary or a joint venture in the country abroad and then pumping equity into the subsidiary for the buy.

"Over 50 per cent of the acquisitions are financed by private equity, while about 30 per cent go for the IPO/QIP route. The remaining 20 per cent opt for a debt-based leverage buyout," said Mehta.

Analysts say companies are happy to take the debt route if they expect cash flow to be good, while they opt for equity if they foresee a scenario where cash flow is not likely to be strong.