Barclays Capital may have completed Pfizer’s acquisition of Wyeth and working on the Kraft-Cadbury deal, but it has had little to talk about in India so far. Having worked as advisor to GTL for its Rs 8,400-crore acquisition of Aircel’s telecom towers, the Barclays arm has opened its account in India 15 months after acquiring Lehman Brothers’ business. In an interview, Barclays Capital Managing Director and Head of Investment Banking Jaideep Khanna tells Sidhartha that there are more deals in the pipeline and discusses the prospects of mergers and acquisitions (M&As) in the months ahead. Excerpts:
The GTL deal is a fairly large one. Does it signal the return of big-ticket M&A activity?
It is all industry-specific. Over the next 18-24 months, certain sectors will see increased activities. One such sector is going to be telecom, as more players may look to hive off their tower business. In my opinion, tower infrastructure is an unnecessary drag on the balance sheet in a sector where there is hyper competition. Also, some of the smaller operators may sell out if telecom companies continue to face pressure on margins and average revenue per user (ARPU). Another sector that may see more deals is healthcare where we have already seen a lot of activity. The margins in the generics business are low and, with large pharma companies facing challenges, they are looking at vertical integration and scale. In the industrials sector, $1-2 billion (Rs 4,500-9,000 crore) ticket deals could happen, but we expect sharper focus in selecting targets. Some of the companies that had acquired companies in 2006-07 are still struggling.
There is a growing realisation that integration is not easy. Overall, Indian companies are far more circumspect now in terms of their inorganic ambitions. While asset valuations are compelling, the environment continues to be challenging. The other theme is feedstock and energy security seen in companies looking to secure coal mines and oil assets abroad.
Will M&As be inbound or outbound?
In case of healthcare, it will be more inbound than outbound. For telecom, it will be a combination. If the regulator eases the norms and adopts a more liberal approach, then there may be a lot of onshore consolidation activity apart from cross-border inbound transactions. There are only two or three Indian companies that can go for outbound cross-border deals. Transactions in which feedstock or energy security is the imperative, will be outbound.
One of the themes in recent months was divestment of non-core businesses, partly driven by the need for cash. Is that trend waning now?
Overall cash flows and liquidity have improved. As the overall pressure comes down, then people are far less focused on the distinction between core and non-core businesses/assets.
Will valuations pose a challenge to deals?
In 2009, a number of companies opted for qualified institutional placements to re-equitise their balance sheet. Since then the stock markets have performed well and even though companies now have the ability to raise significant amount of equity through dilution, it is likely that shareholders and management will be more discerning. Moreover, the government’s divestment programme should add momentum to this trend.
Is the absence of bank funding for domestic M&As proving to be a challenge?
The absence of bank funding poses a challenge primarily to domestic M&As. A more liberal banking and regulatory environment will certainly help matters.
You were missing from the Indian M&A league table last year. What does the situation look like now?
The M&A business is a core activity for Barclays and there is tremendous amount of focus within the bank on this business. GTL is an important client and we are delighted to have advised them on their acquisition of the Aircel tower portfolio. This is the largest single domestic all-cash deal in the Indian corporate history. Overall, the year has started on a good note. There may be another deal in the next few weeks and there is ongoing dialogue on others. Looking forward, we continue to be actively engaged in the market and expect to be advising our clients on more deals as the year progresses.