Catalyst to Economic Growth Mr Sanjeev Sancheti Chief Strategy Officer SREI Infrastructure Finance Limited 27 th May 2016 Mumbai MERGERS amp ACQUISITIONS CLASSIFICATION OF MampA On the basis of Value Chain ID: 718247
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MERGERS & ACQUISITIONS
- Catalyst to Economic Growth
Mr. Sanjeev
SanchetiChief Strategy OfficerSREI Infrastructure Finance Limited
27
th
May, 2016
MumbaiSlide2
MERGERS & ACQUISITIONS
CLASSIFICATION OF M&A
On the basis of Value Chain
Horizontal M&A – acquiring and target companies are competing firms in the same industryVertical M&A – combination of firms in the client-supplier or buyer-seller relationshipsConglomerate M&A – acquiring companies which operate in unrelated business
On the basis of relationship
Friendly M&A
– acquisition in a friendly manner with approval from Board and shareholders of the target company
Hostile M&A
– pitting the offer against the wishes of the target
On the basis of economic area
Domestic M&A
- the firms
involved originate
from one country and operate in that economy-countryCross-border M&A - two firms located in different economies, or two firms operating within one economy but belonging to two different countries
M&A PROCESSSlide3
ECONOMIES OF SCALE
– a classic example would be AB InBev acquisition of SAB Miller which will form a company that makes almost a third of the world’s beer supply
GREATER EFFICIENCIES & OPERATIONAL SYNERGIES - Vedanta’s mega-merger with Cairn India and Aditya Birla Group merger of its branded apparels business Pantaloons Fashion and Madura Garments
ACCESS TO NEW GEOGRAPHIES & NEW PRODUCTS - ATC’s acquisition of 51% in Viom Networks to get access to the Indian Market . Merger of Charter Communication and Time Warner Cable which shall increase Charter’s footprint by 84,000 sq milesBRINGING IN NEW TECHNOLOGY & ENHANCING CAPAPBILITY OF FURTHER INVESTMENT IN TECHNOLOGY – Twitter’s acquisition of Periscope an app for streaming video from a cell phone, Infosys acquiring Panaya which is an ERP startup of Israel, Samsung electronics acquiring LoopPay where LoopPay's technology turns magnetic-stripe readers into a new type of tap-like payment system, requiring no contact with a cardTURNAROUND / REVIVAL STRATEGY – Majority of distressed deals in US Oil & Gas sector happened due to low oil prices in 2015DIVERSIFICATION – Foray of traditional retailer’s in India into the online space like Mahindra Retail’s acquisition of babyoye.com, Aditya Birla going into e-retail through abof.comBRINGING TALENT & EXPERTISE - Acquisition of Letsgomo Labs and Martmobi Technologies by Snapdeal to strengthen its mobile presence, Acquisition of NexTable and Maple Graph by Zomato to acquire mobility capabilities to start online deliveryRISE IN NATIONAL COMPETITIVENESSACCESS TO FOREIGN CAPITAL AND CAPITAL MARKETSINCREASE IN FDI & FOREIGN EXCHANGE
BENEFITS OF M&ASlide4
GLOBAL SCENARIOSlide5
Record breaking year for global M&A
– surpassed previous high of 2007 (from US$ 4.6 tn in 2007 to US$ 4.9 tn in 2015)
Cross border activity on the rise – globalisation continued to be a major driver, cross-border deals were almost third of total dealsMega deals to the forePowerful US performance - The U.S. market continues to power ahead in
an extraordinary way, providing the rocket fuel for growth in other key regionsGrowing Board room confidence - Ready availability of debt finance, record levels of corporate cash, supportive shareholders, has given boardrooms the confidence to pursue significant strategic transactionsPE returns to the buy-out market - After several years of focusing on securing exits, PE funds are now returning to the buyout market and contemplating increasingly complex deals, backed by record levels of fundingTax still a driver - Despite growing opposition from across the political spectrum, U.S. companies are still looking to do tax-driven deals – including inversions – with the aim of investing overseas earnings rather than repatriate them and face a high tax billChina’s Private companies seek outbound opportunities GLOBAL M&A SUMMARY - 2015
Top 5 sectors by deal value (USD)
Activity by Deal Value (USD)
Deal volumes by region
Source: MA& Insights, Q4 2015, Allen &
OverySlide6
GLOBAL SCENARIO - 2015
US$ trillion
As a % of GDP
Source: J.P. Morgan, Dealogic as of January 8, 2016GLOBAL M&A ACTIVITYUS$ billionTotal Cross border deals as a % of total deals
Source: J.P. Morgan,
Dealogic
as of January
21, 2016
CROSS BORDER DEALS Slide7
Extremely accommodative monetary policy
Normalizing of business conditions
Strong US DollarChina’s economic slowdownLow but rising oil prices
Structural reformsMACRO ECONOMIC TRENDS THAT WILL DRIVE GLOBAL ECONOMIC GROWTH OVER NEXT FEW YEARSSlide8
Supportive environment to continue
Commodity-related sectors and Financial Institutions may see a rebound in activity in 2016Asian outbound M&A will remain a significant factor in global transactions going forward
Balance mix will characterize activity$6 trillion in cash reserves held at the end of 2015 provides corporate leaders the firepower to make acquisitions to improve earningsCEOs may also use 2016 to spin off and divest assets to achieve greater earnings growth and corporate clarity
PE funds may play a more significant role since dry powder, the capital available for investment purposes is near record highCross-border transactions will continue to provide a significant source of value creationDesire for higher growth markets, greater value-add products and services, and attractive valuation opportunities are driving increases in outbound activity across regionsEurope may attract more inbound activity as there is better visibility around the return of growth to the regionStrong levels of Asian outbound activity are likely to continueActivist investors will continue to seek expansionAssets under management at activist hedge funds reached $122.9 billion in the fourth quarter of 2015Structural and regulatory distinctions may cast activism in different guises, but investor activism is extending its international reachKEY THEMES FOR 2016SECTORS WITH HIGHEST APPETITE TO ACQUIRETOP INVESTMENT DESTINATIONSSlide9
INDIA STORYSlide10
INDIAN ECONOMY - Summary
India’s macroeconomic situation has improved somewhat during the past year. Growth has picked up slightly and credit rating outlook has improved. Inflation is declining and the currency is stable. There is also increased interest from foreign investors
Private equity deals have increased in the last one year due to more realistic valuations. However, investors are keener on investing in sectors like renewable and logistics. Funds that are nearing the end of their life cycle are chasing exit routes through IPOs more aggressivelyIndia witnessed robust GDP growth rate of 7.2% in 2014-15 and 7.6% in 2015-16.However, headwinds in the form of slow global economic growth, weak domestic private investment demand, concerns relating to stalled projects, excess capacity in industry and sluggish external demand will continue to be prevalent in 2016-17. It is therefore expected that the growth rate in 2016-17 will not improve drastically from the levels achieved in 2015-16.
For 2015-16, the fiscal deficit is about 3.9% compared to about 4% in 2014-15Industry-wise, the performance was mixed. Sectors like electricity, coal, cement, passenger cars and fertilizers have shown positive growthOthers like steel and aluminium reported negative growth ratesSlide11
INDIA M&A DEAL ACTIVITY - 2015
The Indian M&A activity softened in 2015 with a total of 930 deals that were announced with a cumulative disclosed deal value of US$26.3 billion. Deal volume remained at levels similar to the previous year
Decline in domestic deal activity through the year, which declined to a cumulative deal value of US$10.9 billion from 513 deals compared to a total deal value of US$16.2 billion from 493 deals in 2014. The slump in domestic deal activity was Largely due to the absence of megadeals (like Sun-Pharma deal of US$ 3.2bn, Kotak ING deal of US$ 2.4bn in PY)Owing to a weak outlook
Downturn in the commodity cycleLack of big-ticket divestments by debt-ridden companies, which were a significant contributor in PYDomestic deals accounted for 55% of the total deal volume in 2015 (45% for cross-border)Cross-border deals accounted for 59% of the deal value in 2015 (41% for domestic)Technology, retail and consumer products and infrastructure were the most active sectors through the year with respect to the deal volume and accounted for nearly one-third of the total announced deals in 2015. From a value perspective, the oil and gas sector was at the forefront, followed by pharmaceuticals, on account of big-ticket (US$ 500 mn & above) outbound transactionsSlide12
INDIA M&A DEAL ACTIVITY - 2015
M&A activities of Indian Companies
Five Most Active Sectors by Deal Value in 2015
US$ bnFive Most Active Sectors by Deal Count in 2015Number of DealsUS$ million
Source: EY analysis of Thomson One DataSlide13
CROSS-BORDER DEAL ACTIVITY IN INDIA -2015
Geographical Distribution of Deals
Five Most acquisitive nations for Indian Companies in 2015
Top 5 cross-border dealsNumber of DealsFive Most targeted nations by Indian Companies in 2015Number of Deals
Source: EY analysis of Thomson One DataSlide14
DOMESTIC DEAL ACTIVITY IN INDIA - 2015
US$
bn
Number of DealsWith an eye on optimization and efficiency, restructuring deals (mergers and stake/assets transfers within group companies, spin-offs and share repurchases) emerged as a major driver of domestic M&A activity during the year
3 big mergers in 2015 in the domestic arena, done with an aim to build healthy balance sheets, simplify group structures and gain operational synergies:
Vedanta’s announced mega-merger with Cairn India at a deal value of US$ 2.2bn
Aditya Birla Group announced merger of its branded apparels business Pantaloons Fashion and Madura Garments for US$ 818
mn
UPL announced merger of its agriculture seed company
Advanta
with itself for US$ 698
mn
Stakes and assets transfers within group companies were also reported during the year:
Jag Prakashan brought together its two radio businesses, Radio City and Radio Mantra, under the name Music Broadcast to simplify its ownership structure and consolidate its ad sales revenueApollo Group transferred its 55.7% stake in Apollo Agro to Gujarat Apollo Industries and Apollo EarthmoversMax India spun-off its business activities into 3 listed companies, which will be individually responsible for the group’s main business activities, namely life-insurance, health and allied businesses and manufacturing
A few examples of spin-offs being concluded during the year include:
Suzlon
Energy Ltd. selling its German subsidiary
Senvion
to
Centerbridge
Partners LP for Euro 1.05
bn
to reduce its debt burden
DLF signed
definitives
to sell DT cinemas to PVR for US$ 78mn, in line with its strategy to sell non-core assets to reduce its debt burden
Share repurchases well also a prominent aspect across many deals:
Proposed share repurchase plan by Just Dial totalling to INR 165
crs
, while shelving its earlier announced fund raising plans. The Company was expected to utilize the funds as raised for acquisitions, which it suspended citing high valuations of internet companies
Clariant
Chemicals bought back shares for US$ 54
mn
, with a view to reward its shareholders by purchasing the shares at a premium to the prevailing market price, after selling its
Kolshet
Land
Source: EY analysis of Thomson One DataSlide15
SECTOR WISE FOCUS AND OUTLOOK
TECHNOLOGY
SMAC (social, mobile, analytics and cloud) applications – the emerging game changer
FINANCIAL
SERVICES
Insurance leads FS sector
Entering payment solutions
O U T L O
O
K
Strong year ahead as India
Inc
moves on the path of digitization
INFRASTRUCTURE
Clean energy increasingly on the radar of overseas players
Focus on expansion drives deals in logistics
MEDIA & ENTERTAINMENT
Increasing demand for digital platforms
Consolidation in movie exhibition segment & regional consolidation in broadcasting
PHARMACEUTICALS
Indian pharma majors continued to acquire globally
Domestic consolidation remained prominent in branded generics
REAL ESTATE & HOSPITALITY
Corporate demand & realistic valuation aid deals in hospitality sector
Real estate witness green shoots
RETAIL & CONSUMER PRODUCTS
Domestic action in F&B – packaged foods & alcoholic beverages
Online retail segment – increasing prominence
Personal care – new avenue for growth
TRAVEL
SERVICES
Online taxi aggregators taking inorganic route to scale up
Exciting time for online tour and hotel aggregators
A positive credit growth outlook to support banking and NBFC market
Consolidation in AMC space
Online transaction through payment banks
A promising road ahead (100% FDI in most of the infrastructure segments)
Sustained momentum expected in coming year
International Markets – an avenue for continued growth
Supported deal fundamentals aided by the government to lead to increased deals in the sector
Outbound deals to increase in personal care; consolidation in e-retail segment
Consolidation & acquisitions of new age companies will help sustaining the momentum in the coming yearSlide16
TOP 10 DEALS FOR 2015Slide17
OVERALL INDIAN M&A OUTLOOK FOR 2016
Deal activity to pick up in 2016, domestic deals which were subdued in 2015 like to see more consolidation deals especially in sectors like – infrastructure and manufacturing, retail and pharmaceuticals
Inbound front may see increased activity from Japan - softness in relationship of both countries , further fuelled by low interest rate in Japan compelling Japanese Corporations with huge cash piles look new avenues for growth. Manufacturing such as automotive and Specialty Chemicals sectors most likely to benefit of this
Outbound investments continued to be led by oil & gas and pharma sector quite similar to last yearRecent FDI norms and the much awaited GST will perhaps be a game changer and will further accelerate the deal activity from an inbound investment, domestic M&A and PE perspectiveStrong interest from both foreign investors and domestic players in buying out stressed assets. Stressed assets worth ~INR3tn in the system. Investors are looking this as an opportunity to hunt for good assets which could yield high returns
Support
from 'Make in India' initiative and thrust on
defense
. Many
FDI announcements in
defense
and insurance sectors as the government lifted / diluted FDI caps. These factors will continue to support corporate actions in 2016.
Key factor to have a considerable impact on M&A in 2016 shall be the pickup in CAPEX cycle of Indian players. This may pick in second half of 2016 due to two triggers:
Government’s focus on core infrastructure and plans it has announced for road and highways, smart cities and Digital IndiaFurther cut in the rate by RBI, should support the demand cycle, aid industrial recovery and boost economic growth in the countryOnly challenge could be ongoing global slowdown and constraints in capital raising. Global M&A deals in 1Q2016 were already down 25% to USD701b. However, India in a sweet spot in the emerging markets. Most foreign investors and companies are bullish on fundamentals of Indian economy.Slide18
THANK YOU