High volatility in market and higher premiums overwhelm effect of easier Sebi norms.
Despite implementation of the new takeover norms that increased the trigger for a compulsory open offer to 25 per cent of the total stock, private equity (PE) investors are keeping away. Against three private investment in public equity (PIPE) deals worth $291 million in June, this month witnessed a single deal worth $1.58 mn.
Experts say the current market volatility and the high premium to be paid for shares are pulling PE players back from PIPE transactions. The takeover code that the Securities and Exchange Board of India (Sebi) implemented from November 1 had increased the open offer threshold from the earlier 15 per cent.
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Renuka Ramnath, managing director and CEO, Multiples Alternate Asset Management, said, “It’s been only a couple of months since the regulations changed. This has coincided with high volatility in capital markets, which is not conducive to deal closure, as both issuers and investors recalibrate their expectations.”
There were no PIPE deals in July and one in August, worth $26.7 million, plus two deals in September. “The primary requirement in making such investments is to be able to protect minority interest and have a sizable stake to influence governance, all of which is helped by having a larger stake,” she added.
To avoid the higher premium to be paid for PIPE transactions, PE firms are opting for open market transactions. A partner at a PE firm, on condition of anonymity, said, “The higher premium to be paid over the current market price in this volatile market is a major concern for PE investors.”
In the second largest deal in the past three years after Bain and GIC acquired 26 per cent in Hero, US-based Apollo Global Management invested about $500 mn in three companies of the BK Goenka-promoted Welspun Group. Of this, it invested $290 mn in Welspun Corp, paying Rs 225 per share, a 33 per cent premium to Welspun’s closing price on June 28. Shares of Welspun Corp touched an all-time low of Rs 68.50 on the Bombay Stock Exchange (BSE) on November 24.
In May, KKR and IFC, which together acquired 27.75 per cent in Magma FinCorp Ltd for about $100 mn, paid Rs 88 per share, a 20 per cent premium to the trading price. Magma shares touched an all-time low of Rs 48 on November 18 on the BSE.
Compared to three open market transactions by PE firms on July, nine open market deals took place in August, another three in September, four in October and one in November, according to data from VCCedge.
According to Avinash Gupta, national leader — financial advisory practice, Deloitte Touche Tohmatsu, apart from the cheaper valuation, other factors that give a high hand to investors also matter. He said, “In PIPEs/open market transactions, investors are looking for important rights to be made out of the deals. Allowing a seat on the board is one which can attract more transactions in the space.”
Recently, India Infoline Ltd appointed Sunil Kaul, senior director with the Carlyle Group, as a non-executive director after the global PE giant acquired about 10 per cent in IIFL through open market transactions. Similarly, Magma Fincorp Ltd had appointed Sanjay Nayar, CEO of KKR India, to its board as a non-executive director after KKR bought 14.95 per cent in it. PE majors believe that acquiring larger stake will give them a high hand over a period and more PIPEs are likely to be signed.
Sri Rajan, managing director and head of the private equity with Bain & Company India, said, “Today, promoters are in a wait and watch mode. They do not want to dilute equity at a lower valuation. However, if the same situation continues for the next six months, they will be forced to sell stake at cheaper valuations through PIPEs which will give a high hand to the PE firms.”
“I am confident that the change in regulations is a step in the right direction and will aid the flow of long-term institutional capital to mid-size companies, many of which are listed but have no liquidity,” Renuka added.
