Home-grown investment bank Ambit has been one of the most active advisors for mergers and acquisitions (M&A) involving mid- and small-size companies. In an interview with Abhineet Kumar, Chief Executive Officer Ashok Wadhwa says the proposed changes in the takeover code suit multinational companies (MNCs) with deep pockets. He also sees banks merging with non-banking finance companies (NBFCs) once the central bank decides to give new banking licences.
You have been a leading advisor for mid-sized deals of less than $500 million (Rs 2,300 crore). What is your outlook for deals in this segment?
At present, there is a lot of activity in the mid-tier space. It is emerging both from domestic players who want to consolidate and multinationals looking at specific industry verticals.
Given the outlook on India and believing that the consumption pattern in India is now sustainable, there is clearly greater interest by both domestic players who have access to capital and MNCs who don’t have presence in India and are looking at mid-cap opportunities to consolidate.
I think there will be a lot more activity in the mid-cap space, partly because these companies are unlisted and, hence, it will be much easier to close the transaction. Also, these firms happen to be in a business or industry where opportunity appears to be extremely attractive.
Ambit advised HDFC Bank for acquisition of Centurion Bank of Punjab two years ago. There are fresh talks of consolidation in the industry with ICICI Bank acquiring Bank of Rajasthan. Can we expect a fresh round of M&As in the banking industry?
Old private sector regional banks have to decide whether they want to retain their regional position. There is nothing wrong with that, as they have been quite successful as regional banks. Or, they can opt for large India-wide footprint. If you look at relative market valuations, the market rewards pan-India institutions with a higher multiple. It leads me to believe that regional bank will have to make a call. If they want a pan-India network, clearly the strategy would be organic versus inorganic. Getting new branch licences and setting up new branches in different locations may be a little more challenging. Consolidation may be an easier option.
Do you see some consolidation emerging out of the Reserve Bank’s decision to award new banking licences?
I see some activity. It is quite possible that some existing NBFCs that aspire to be a bank will look at merging with one and creating a pan-India presence. As NBFC will be the one which get banking licences and have significantly more branches, while a bank will be able to get a wider spread.
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Which are the other sectors where you expect significant activity?
We see some activity in the telecom sector also. There are new licences that have been issued. We can see the effect of bidding and licences on valuations of existing telecom companies. The increase in cost and capex, coupled with the challenge of sustaining revenues, indicates consolidation sooner rather than later.
I see a similar scenario for the other media, radio. After Phase-I and II, the government is getting ready to roll out Phase-III, which will mean multiple frequencies in the same city. Therefore, existing large players need to decide whether they want to get a new bandwidth or consolidate with existing players. In a business stressed on the revenue side, anything that you can do to reduce cost will help.
Ambit has been more or less absent from telecom deals. Do you plan to strengthen this vertical?
We did some work in the telecom space from early 2002 to 2004. We represented Bharti in one or two acquisitions. After 2004, one of our key partners left us and we did not participate in the consolidation. We see new consolidation opportunities in telecom now. We are very clear that we need to focus selectively. Transactions will happen in many sectors. But, we are building additional strength at this point in time by allocating internal resources to the telecom sector. We hope to participate in some of the telecom activities in future.
New guidelines for the takeover code propose open offer for 100 per cent outstanding shares and not just 20 per cent. Is it going to impact M&As, as the cost of acquisition will rise significantly?
A domestic M&A transaction can be classified into categories: an acquisition by a promoter in a business in which he is not active or in a business in which he is active and wants to consolidate. In consolidation, the new guideline will have no affect, as any way the promoter aimed for a merger, which is exempted from the take overcode. What has changed is that if a new Indian promoter wants to acquire a listed company, he has to make an offer for 100 per cent versus 20 per cent earlier. As Indian promoters prefer acquiring listed companies and their ideal choice is 51 per cent, it increases the cost. Therefore, it will be a little discouraging for Indian promoters planning to acquire new businesses.
On the other hand, if you look at majority of acquisitions, a larger part of listed companies are acquired by MNCs who prefer to have unlisted companies in India. In this case, the new code will be a preferred method. It allows companies to de-list without going through the de-listing process.