With a banner year for deals, India overtakes China as a favoured target

Deal making in India topped $92 billion this year

India is having its busiest year ever for corporate deal making, as foreign buyers are now spending more here than in China.

Companies and investors alike are betting the world’s fastest-growing large economy—once seen as bureaucratically sclerotic and unpredictable—is turning into a destination that offers opportunity driven by hundreds of millions of consumers. Other deal drivers include industry consolidation, a better bankruptcy system and a growing willingness among owners of large family businesses to cash out.

In all, mergers and acquisitions targeting Indian companies totaled $93.7 billion this year—up 52% from a year earlier—which is the highest tally since the economy started opening up in the 1990s, according to Dealogic. The value of overseas purchases in India has overtaken those in China. Acquirers spent $39.5 billion in India versus $32.8 billion in China, where growth is slowing and a trade battle with the U.S. is underway.

Prime Minister Narendra Modi is striving to make life easier for business. He has eased foreign direct investment rules, implemented a new bankruptcy code, replaced a complex web of taxes with a nationwide goods and services levy and promised policies to end “tax terrorism,” which in the past left some international firms with surprise retrospective bills. The country leapt 23 places in the World Bank’s ease-of-doing-business ranking this year.

“Overall the environment is far more conducive to deal activity,” said Pramod Kumar, managing director and head of banking at Barclays in India.

Growth is now faster than China’s and holds the promise of a huge group of higher-spending consumers. India’s gross domestic product will almost double to $5 trillion by 2030, according to a report by government think tank NITI Aayog.

Enthusiasm is reflected in the nation’s public markets as well. The S&P BSE Sensex index is up 4.2% this year, making it one of the few benchmarks in the world in positive territory. India’s currency hit record lows earlier this year but the rupee has recovered some ground as oil prices have tumbled. India is a major importer of energy.

“Anything which touches the domestic consumption story has to be of interest,” said Sundareswaran S., executive director at Morgan Stanley in Mumbai.

Earlier this month, Unilever NV said it agreed to buy Horlicks, a malted-drink brand that is hugely popular in India, from GlaxoSmithKline PLC as part of a $3.75 billion deal. These kinds of large purchases allow companies to leapfrog the arduous process of establishing new businesses on the ground.

In the year’s biggest transaction, Walmart Inc. invested $16 billion for a majority stake in Indian e-commerce firm Flipkart Pvt Ltd. Technology firms have also attracted investors like SoftBank Group Corp , Naspers Ltd. and Alibaba Group Holding Ltd.’s Ant Financial Services Group. On Thursday, Naspers said it led a $1 billion fundraising for Swiggy, a food-delivery app company. In September, SoftBank led a $1 billion investment in hotel-booking startup OYO Hotels.

Executing deals is still difficult in India. A merger begun last year between Vodafone India and Idea Cellular Ltd. took 18 months to complete. Bankers say acquisitions of listed companies are still too complex. And a general election next year could temporarily slow the pace of takeovers.

Since the introduction of the bankruptcy code, hundreds of companies have entered insolvency proceedings and their owners are losing control, which was unimaginable just two years ago.

That is enabling deals like Tata Steel Ltd.’s $8.3 billion acquisition of domestic steelmaker Bhushan Steel Ltd. Hopes for an infrastructure and construction boom have led to fierce bidding for some assets from the bankruptcy court.

“It’s not a surprise that you have all these big guys who have been in steel, 10, 20, or 100 years getting so excited. In how many other countries are people so excited about buying steel assets?” said Kaustubh Kulkarni, head of investment banking at JP Morgan India Pvt. Ltd.

At the same time, energy and telecommunications markets are consolidating as larger players buy out struggling smaller counterparts. Reliance Jio Infocomm Ltd.’s aggressive push to sign up hundreds of millions of mobile users two years ago with low prices turned the industry upside down and spurred deals like Bharti Infratel Ltd.’s acquisition of Indus Towers Ltd. this year for $6.5 billion.

Sovereign wealth and pension funds are targeting local property and infrastructure assets. And bankers say the families behind some closely held companies are warming to the idea of selling controlling stakes, creating opportunities for private equity.

“Ownership is gradually becoming more financial than familial,” said S. Ramesh, CEO of Kotak Investment Banking. The Wall Street Journal