M&A activity in Indian mid-market industry slows to $18 billion

27 March 2018 Consultancy.in

Karan Gupta, head of the Corporate Finance department at BDO India, reflects on the state of the Indian mergers & acquisitions (M&A) market for the mid-market segment.

India is on a growth fast track with a growing youth population and an emerging middle class that is driving consumption. These factors, combined with an upswing in demand for technological advancements, infrastructure development & upgrading, a welcoming regulatory policy framework, and the ‘Make in India’ impetus are driving sectoral growth. At the same time with the introduction of the new Bankruptcy code, stressed assets are available at attractive valuations. As a result, M&A activity is expected to surge, with ASSOCHAM’s Year Ahead Outlook (AYAO) putting the overall M&A activity estimate in India at $50 billion in 2018.

Despite the slowdown observed in early 2017 and the lingering effects from the demonetisation policy, the outlook for India remains largely positive. The Indian economy is expected to grow at 7.2% in 2018 and accelerate to 7.4% in the forthcoming year following robust private consumption, public investment and structural reforms, according to a United Nations report.

Private Equity M&A volume and value in India

M&A in mid-market: an $18 billion industry

India has continued to be a healthy deal-making market throughout 2017 and is expected to keep growing in the coming years. In the calendar year 2017, India witnessed $18billion+ worth of M&A activity in the mid-market segment. However, compared to 2016, when the mid-market witnessed M&A worth $21 billion+, M&A transactions were lower in 2017 in terms of both volume and value.

This could partly be attributed to effects of demonetisation, the initial phase of Goods & Services Tax implementation and rigorous implementation of the Insolvency and Bankruptcy Code 2016. This in turn had temporarily halted a lot of M&A’s due to take place in 2017. The total of mid-market deals in 2017 was 259 as compared to 307 in the previous year.

However, with the continuing impetus of the ‘Make in India’ theme, growth in consumption and effective structural reforms, the mid-market segment continues to see lots of activity. This is also driven by the mid-market businesses’ investment in technology, need for capital for growth, increasing domestic market penetration and seizing of overseas opportunities.

Trade deals accounted for 69% of the total deals whereas private equity deals stood at 31%. This is very similar to 2016. Though the number of private equity deals in the mid-market reduced from 95 in 2016 to 81 in 2017, the private equity deal value increased by 36% for 2017 to ~$6.9 billion from ~$5 billion in 2016. Additionally, in Q4 of 2017, just 13 private equity deals carried a value of $3.5 billion – a stark contrast with the 28 deals at a value of $3.9 billion in 2016.

M&A in mid-market segment of India

Key sectors and M&A deals

In 2017, Industrials & Chemicals tallied 63 deals (contributing to 23% of the total) followed by Consumer accounting for 20% and Financial Services with 12%.

A roundup of a few deals that made a large impact over the past months:

The Indian arm of Warburg Pincus announced that it would be acquiring up to a 20% stake in Bharti Airtel, which is one of India's largest telecom operators. The partnership is poised to reap returns since Airtel has been the outperformer in the telecom space post demonetisation.
The Retail sector witnessed traction through the Future Retail-Hypercity deal. Hypercity is a chain of high end grocery and merchandise outlets and is also the listed arm of Shoppers Stop/ Rahejas.
In the Industrials segment, JSW Group has taken a 49% stake in Brahmani River Pellets (BRPL), which makes iron ore pellets. BRPL is owned by Aryan Mining and Trading Corp, a joint venture between British mineral trading company Stemcor and Calcutta-based Saraf Group.
In the consumer / food space, South Korean major Lotte Confectionery made a foray into the Indian ice cream market by purchasing 100% of homegrown ice cream brand Havmor for a reported all-cash deal valued at $152 million.
In the Ecommerce segment, Alibaba.com entered into a definitive agreement to acquire a stake in online grocer Supermarket Grocery Supplies (BigBasket.com). The deal is potentially to the tune of $300 million.