Great Indian promoter sale: Strategic deals with foreign players on rise

Faced with severe financial stress and banks no longer able to bank-roll them owing to the stiff new NPA guidelines, a growing number of Indian promoters are either diluting their stakes in their companies or simply cashing out. 

Welcome to the great Indian promoter sale. According to the Bloomberg data, last year foreign strategic buyers (companies and PE funds) put in over $23.45 billion in buying out controlling stakes in Indian companies. It was a record year for mergers and acquisitions in the country. In fact, in the last three years (2016, 2017 and 2018) they put in $52.6 billion to buy controlling stakes in Indian companies compared to half that amount, $25.6 billion, between 2013 and 2015. (See chart)

One reason for companies to sell their stakes is to pay for their burgeoning group debt and their unwillingness to lose everything if they get subjected to the Insolvency and Bankruptcy Code. For example, Anil Ambani’s Reliance Capital has announced the sale of its 42.88 per cent stake in Reliance Nippon Life Asset Management Ltd to reduce its Rs 18,000 crore debt. And Zee Entertainment Enterprises is ready to offer up to 25 per cent stake to a strategic partner to partly pay off the group debt which they had incurred by pledging their shares in the company. Puneet Goenka, CEO of Zee, whose family built the media giant from scratch, says he is willing to be an equal partner with the strategic investor.

The reason for the huge upsurge in buying out controlling stakes from Indian promoters is because the latter have built valuable assets and businesses. Last year Walmart bought Flipkart for $16 billion, marking the exit of its founders who had continuously diluted their stake to grow and fund losses. In 2016, Russian energy giant Rosneft and its partners announced it was gobbling up Essar Oil for $13 billion. Essar Oil’s promoters, the Ruias, found that this was the only way they could reduce their group’s ballooning debt. 

However, the deal was closed only in 2017. If you look at the private equity (PE) fund space too, many more Indian companies are willing to hand over controlling interest now. According to VCC Edge, which tracks all PE activity, the total value of control deals increased by over 20 per cent from $4.9 billion in 2017 to $5.9 billion in 2018. In the same period, the share of the value of control deals went up from 16.7 per cent to over 20 per cent of the total value of PE deals. 

Again, according to data from leading private equity funds, while the value of the five top PE control deals was $700 million in 2017, last year global investment firm KKR alone closed deals worth US 1.2 billion to pick up majority stakes in Analjit Singh’s Max India as well as a 60 per cent stake in Chennai-based Ramky Enviro Engineers. Clearly, PE deals are getting bigger. 

According to VCC Edge data, the average deal size in the last two years has doubled to an average of $22.5 million compared to $10.2 million (over 2015 and 2016).

Says Kalpesh Kikani, senior managing partner in AION Capital, “Today, Indian promoters are much more willing to see a PE fund as an equal partner or in some cases a majority partner, rather than as a financier. They are more comfortable with the idea of being a minority shareholder.”
 

The view is endorsed by others too. “Long term and strategic transactions continue to be of big interest and attract huge foreign capital. We also believe that increased activity on the stressed assets front continue to see higher involvement of PE firms,”  says Atul Mehra, managing director and co-Chief Executive Officer (Investment Banking) at JM Financial.  

Another reason many companies are selling out is that often, the next generation is unwilling to join the same business and hence do no mind others running the show. Analjit Singh, who recently also sold his stake in the health insurance business, says that none of his children were keen to continue in the same businesses.

As opposed to this, in the e-commerce space, the challenge for promoters has been to finance losses and to grow the business by fresh equity infusion. With the IPO route not available to them and with PE funds putting in money, the stakes of promoters get substantially diluted. The option to cash out to a strategic investor becomes an attractive one. That is what Sachin and Binny Bansal did when they sold Flipkart to Walmart.