India witnessed heightened deal activity in the first half of 2007 with the value of M&A transactions crossing $55 billion, spread over 550 deals, far exceeding the total deal value recorded for all of 2006. Notable amongst deals during the period were the sharp acceleration in outbound activity by Indian corporates, and significant growth in private equity investments in the country.

Outbound investments, which included Tata Steel’s $13.6 billion acquisition of Corus and Hindalco’s $6 billion acquisition of Novelis, exceeded $28 billion. In a way these two large deals have brought Indian M&A to the global forefront, where India’s outbound M&A during the first six months of 2007 was second only to Australia.

Paradigm shift
It has also broken the myth that Indian businesses are all about IT and outsourcing, as most of the outbound M&As were by companies belonging to the ‘traditional old economy sectors.’ Sectors such as energy, oil & gas, steel, cement, aluminum and other metals accounted for over 50 per cent of the total deal value compared to just 20-25 per cent of deal value a couple of years back. This is reflective of the fact that Indian companies in these sectors are looking to be competitive globally.

A number of these deals were debt funded, highlighting the confidence that the Indian and overseas banking and finance community has in the Indian companies to make these acquisitions work.

Some of the other key outbound deals reported during this period included the following:
nTata Power’s acquisition of PT Kaltim Prima Coal and PT Arutmin,  Indonesia for $1.1 billion. This deal has given Tata Power access to one of the largest exporting thermal coal mines in the world.

*Essar Steel’s acquisition of Canada-based integrated steel producer Algoma Steel Inc for $1.58 billion.
*United Spirit’s acquisition of premium scotch distillers Whyte & Mackay, Scotland for $1.17 billion.
*Suzlon Energy Limited’s acquisition of a 74.6 per cent stake in REpower Systems AG, the German manufacturer and supplier of wind-powered generating facilities for $1 billion.
*Sun Pharmaceuticals’ acquisition of Israel's generic manufacturer Taro Pharma for $446 million, making it the second largest overseas acquisition by an Indian drug company. While outbound deals were clearly the flavour of the season, domestic and inbound investments too scaled new peaks for any first half on record. The most significant of these being Vodafone’s acquisition of a 52 per cent stake in India’s fourth largest mobile service operator Hutchison Essar for a consideration of $10.9 billion.

Other key deals:
*Vedanta Resources, acquired 51 per cent controlling stake in Sesa Goa for $981 million.
*Mittal Investment’s (a wholly-owned unit of Arcelor Mittal NV) acquisition of 49 per cent stake in Guru Gobind Singh Refineries, oil & gas refinery for approximately $747 million.
*Matsushita Electric Works’ acquisition of 80 per cent stake in India’s oldest and largest electrical accessories and wiring devices company, Anchor Electricals for a consideration of $420 million.
*Jet Airways acquisition of Air Sahara for approximately $339 million.

Fashion of fusion
The domestic deal activity during the period also highlighted consolidation, notably in the telecom and aviation sectors. The Vodafone-Hutch transaction signaled the commencement of what should be the last phase of consolidation in the Indian telecom space; likewise the Jet-Sahara and the Kingfisher-Air Deccan deals signified the consolidation of the Indian aviation sector which has been bleeding for a bit. Private equity investments have also been rising steadily, with over 200 deals during the first half of 2007 – in value terms the private equity deal activity crossed $6 billion, compared to the $7.9 billion for the whole of 2006.

There has also been a shift in sector focus by private equity with industries such as real estate, banking and financial services, media & entertainment witnessing tremendous growth in investment vis-à-vis traditional sectors such as IT & ITeS, pharmaceuticals & healthcare and telecom.

For instance, investment in banking & financial services accounted for over 20 per cent of total private equity investment in H1 2007 vis-àvis just 7-8 per cent in 2005 and 2006.

Some of the notable private equity deals during the first six months of 2007 include:

*Carlyle Group and Citigroup  invested $786 million for a 7.11 per cent stake in HDFC.
*National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), two of the biggest stock exchanges in India, saw private equity firms pick up stakes in them following the change in FDI norms. NYSE Group Inc, Goldman Sachs Group Inc, General Atlantic LLC, and Softbank Asian Infrastructure Fund, invested approximately $500 million in NSE for a 20 per cent stake. Deutsche Bourse and Singapore Stock Exchange each picked up 5 per cent stake in BSE, wherein each party paid an amount of $42.7 million.

*US based hedge fund, Avenue Capital Group, invested $500 million in SKIL Infrastructure for a 26 per cent stake.
*Blackstone Group acquired a 26 per cent stake in Ushodaya Enterprises Ltd,  owner and operator of television stations for $275 million, and invested an amount of $200 million for an 80 per cent stake in Intelenet BPO.
*In one of the largest FDI deals in Indian realty, Morgan Stanley invested $152 million in Oberoi Constructions for 10.75 per cent stake.

Outlook
M&A activity is expected to remain on an uptrend in the second half of 2007, and the dominance of cross border deals is expected to continue. Consistently strong economic growth, combined with continuation of the reform process and improvements in infrastructure by the Indian government, is likely to boost FDI, but significant policy changes appear unlikely.

Segments where an FDI cap is expected to be relaxed further include petroleum refining (from 26 per cent to 49 per cent) and civil aviation businesses such as ground handling, maintenance & repair and air charter services, where up to 100 per cent foreign investment is expected to be permitted, as against 49 pc at present.

The Indian government is also expected to finalise the guidelines for allowing up to 49 per cent foreign investment in commodity exchanges, a move which is expected to result in significant investments.

Further liberalisation of the FDI regime is also expected with a plan to exempt several sectors from the mandatory requirements under Press Note 1 (PN 1), which requires multinational corporations in existing joint ventures to obtain no objection from its Indian partners before starting another venture in a similar line of business. Sectors such as advertising, hospitality and franchisee operations are being considered to be kept out of the purview of PN 1.

Private equity and venture capital investments are expected to rise even further, and exceed $10 billion in 2007. While there have been some valuation concerns within the private equity community, the sequential growth experienced by the Indian economy has meant that the private equity investors have stayed interested.

Source: Half year India M&A update June 2007 by PricewaterhouseCoopers