PE deals fall apart in M&A Street - Indian economy slowing down??

[nishantgandhi]

No one’s burning rubber up the asphalt these days, at least not on deal street. With a string of deals falling through in the past few months, dealmakers at India Inc seem to be cooling their heels, at least for the time being.

Compared to the corresponding period last year, M&As have dried up and their announced valuation in the first three months of this year coming down by almost 71%. And though PE deals have hit the road again after an initial stutter, the buzz in investment banking circles is depicting a different story, that of deals not going through.

Sample this: Recently, the retail arm of the Future Group, K****ij Advisory Services, which formed a strategic JV with CapitaLand, Asia’s largest property group, to form K****ij CapitaLand Mall Management Co, has been called off.

Subsequently, a deal announced in January this year by Mumbai-based shipping major Great Offshore, to acquire the UK-based SeaDragon Offshore for $1.4 billion, is said to be now under review.

Similarly, another JV between Pantaloon Retail India and kidswear brand Gini & Jony has expired. Future Group CEO Kishore Biyani, confirms it. “It’s true that the JV with Gini & Jony didn’t work out,” says Mr Biyani. “But talks with CapitaLand are still on. It’s going to take another two years perhaps for things to materialise.”
And if sources in the mergers and amalgamation world are to be believed, it is not only acquisitions that are falling through. After the market meltdown in January this year, private equity deals are also drying up or getting deferred.

Ajay Arora, partner at Ernst & Young says, “Lot of investors have backed out and are now playing the wait-and-watch game. Compared to the October-December period last year, almost 15-20% of PE deals have not gone through this quarter.”

For instance, two Rs 100-crore PE deals concerning the Chandigarh-based Modern Dairy and Hyderabad-based HBL Power Systems have reportedly been scrapped recently. Indivision India Partners, the private equity fund of the Future Group, is said to have called off a Rs 250 crore deal with Zee group’s Dish TV.

Also, General Atlantic Partners reportedly backed out of Essar Power, after signing the term sheet. Similarly, Citi Venture Capital and AIG have also called off their Rs 1,500-crore deal with the Mumbai-based real estate developer Akruti City. In the last three months, more than 15 PE deals have been called off. And the number could grow.

So what’s up? With market sentiments dented and valuations of firms looking stretched, investors are shirking away from deals struck during better days last year.

Also, PE investors who started negotiations before the market plummeted, are finding it difficult to close old deals and finance fresh ones. Vikram Utamsingh, India’s ED of M&A at KPMG, takes the argument a bit further.
“There is another reason why PE deals are holding up. After the market meltdown, PE firms in India have been asked to be selective by their global boards, since now opportunities in the US are also cheap.”

Experts agree the number of closed deals could have been much higher this quarter. And this comes at a time when the total number of PE deals during January-March, 2008, stands at 124, with an announced value of $4.38 bn, which is much more than the 112 deals amounting to $2.98 bn during the corresponding period last year.

The grapevine in investment banking circles is whispering that most of the PE deals closed during January-March, 2008, have spilled over from the October-December period last year when PE activity was at its busiest best.

“You will see the impact of the slowdown of PE deals only in the next quarter,” says Mr Arora of Ernst & Young. And perhaps the decrease in valuation of the closed deals last month throws open the floor for the slowdown debate.

Sample this: Though the total number of PE deals struck last month increased from 27 deals in February to 35, the announced value of $1.21 bn is much less than the $1.48 bn garnered in February.

Says Bharti Gupta Ramola, leader of transactions practice at PricewaterhouseCoopers, “There are a lot of deals that are not going through. Promoters are just not ready to negotiate. It might take another six months for things to settle down.”

PE deals might still have a chance with investors ready to pump in funds but M&A deals don’t have the cushion of increasing numbers or swelling valuations.

For instance, the total number of M&A deals during January to March, 2008, stands at 125, with an announced value of $9.64 bn against 148 deals amounting to $33.85 bn during the corresponding period in 2007, according to the latest deal tracker of advisory firm Grant Thorton.

Domestic deals are also being pushed to the wall. After the scrapping of the K****ij CapitaLand Mall Management Co and Gini & Jony deals, the Future Group seems to have run into rough weather over yet another one. The JV between Planet Retail and Pantaloon Retail is reported to have come under the scanner.

But Mr Biyani disagrees, “The venture with Planet Retail is still on, we are doing business based on certain agreements. They have kept some brands with themselves and so have we.” But investors are quite optimistic. To sum it up, Mr Arora of Ernst & Young, says, “There is a lot of money waiting to be pumped in. It’s a question of who blinks first.”

Source: Economic Times