M&A deals decline in Q1CY19, PE activity remains robust: EY India

After a record year for Indian M&A, deal-makers paused a little in the first quarter of 2019, thanks to a subdued global M&A market. Besides, the uncertainty around general elections results also appear to have added to the sub-par performance. 

According to an EY quarterly report, M&A activity in Q1CY2019 (January-March) fell to 242 deals valuing $9.9 billion, from 260 deals having a disclosed deal value of $21.6 billion in Q1CY18. Deal activity in the first quarter fell 7 per cent in volume terms and 54 per cent in value terms.

While it was a soft quarter, the activity remained in mid-sized deals (deal size between $20 million and $500 million saw 47 deals aggregating $4.4 billion), in line with the long-term quarterly mean, highlighting the steady foundation of the M&A market.

Domestic deals

Domestic deals saved the day for deal-makers in Q1CY19, with 158 deals accounting for an aggregate disclosed value of $7.1 billion. This contributed ~65 per cent to the total deal volume and ~72 per cent to the total disclosed deal value. While consolidation remained the primary deals driver, financial deleveraging, faster pace of insolvency proceedings and opportunistic buys by big industry players also added to the push. 

The quarter also witnessed two mega deals ($1 billion+) in the domestic arena. The largest deal was the $3.2 billion merger of Bandhan Bank and Gruh Finance. It was followed by Tata group-led consortium’s $1.2 billion investment in GMR Airports.

Commenting on the M&A scenario, Amit Khandelwal, Managing Partner, Transaction Advisory Services, EY said, “While the relative softening in the deal activity reflects the overall tepid nature of the global M&A market, the M&A was notable on the domestic front on the back of strong investor sentiment and sustained deal appetite. Nonetheless, the long-term prospects for the Indian transactions market look good, on the back of a stable and a strong government at the centre with its laser focus on growth and development, along with ongoing consolidation and restructuring activities."

Ajay Arora, Partner and National Leader, Investment Advisory Services, EY said, “After a record year for Indian M&A, deal-makers paused a little in the first quarter of 2019, thanks to a subdued global M&A market. Besides, the uncertainty around general elections results also appear to have added to the sub-par performance.’’ 

But confidence remains high. Two-thirds of Indian executives expect to actively pursue M&A in the next 12 months, a significantly higher reading than 32 per cent in April 2018 and the 10-year average of 40 per cent, added Arora.

Cross-border

Cross-border M&A showed mixed trends during the quarter. While inbound deal value increased by 21 per cent, outbound deal value declined by 53 per cent on a Y-o-Y basis. On the volume front, both inbound and outbound deal activity declined 14 per cent and 17 per cent  Y-o-Y, respectively. The US continued to be the most active cross-border M&A partner for Indian companies during the quarter, with a total of 28 deals (14 inbound and 14 outbound deals) totaling $840 million. Japan and Germany emerged as other favourite deal partners.

Sector view

Financial services ruled the charts in terms of deal value, with 17 deals totaling $3.5 billion. The sector remained in focus on the back of recent liquidity crisis in the NBFC space and consequent consolidation activities. In terms of deal count, the technology sector continued to dominate the M&A market, with digital disruption being at the core of the corporate’s growth strategy. Infrastructure and consumer products and retail were other active sectors during the quarter.

PE activity

PE/VC investments touched an all-time high in Q1CY19. On a Y-o-Y basis, quarterly PE/VC investments in Q1CY19 increased 37 per cent in value terms compared to Q1CY18 ($ 11.4 billion vs $ 8.3 billion in Q1CY18) and by 31 per cent in volume terms over the same period (239 deals vs 183 deals in Q1CY18). On a sequential basis, compared to Q4CY18, the quarterly increase in investments in terms of value and volume was 37 per cent and 17 per cent, respectively.

This increase in investments in Q1CY19 was mainly on account of higher value of large deals (deals with value greater than $100 million), especially in the infrastructure sector. Q1CY19 recorded 26 large deals aggregating $8.9 billion compared to 13 such deals in Q1CY18 aggregating $5.7 billion. Q1CY19 recorded buyouts worth $3.6 billion, 24 per cent higher compared to Q1CY18 ($2.9 billion). It was the highest ever value of buyout deals in a quarter.

After a strong 2018, PE/VC exits in 2019 have taken a breather. In Q1CY19, PE/VC exits declined by 23 per cent on a Y-o-Y basis and by 42 per cent compared to Q4CY18 to $1.4 billion, recording the lowest quarterly value of exits in over 11 quarters. There were two PE-backed IPOs in Q1CY19 compared to four in Q1CY18 and one in Q4CY18.

Q1CY19 recorded one of the largest PE-backed IPOs and India’s first ever REIT offering, which saw Embassy Office Parks (a joint venture between Blackstone and Embassy Group) raise close to $678 million. Q1CY19 recorded $2.8 billion in fund raises, more than twice the funds raised in Q1CY19.

Outlook

Going ahead, India is expected to witness stable M&A activity on the back of domestic consolidation and continued interest of foreign investors. While some companies may take a pause in the current volatile world, many are expected to continue with their growth strategy and make the best use of available opportunities in domestic arena. While domestic consolidation will continue to drive deal activity, corporate restructuring and balance sheet deleveraging by highly-indebted player will also provide a push to the deal-making. On the cross-border front, a sense of caution is likely to prevail, given the high levels of economic and political uncertainty, and increased market volatility on the global scale. While international players may adopt a rather judicious approach towards target evaluation, India’s high consumption growth potential will continue to garner investor interest in select sectors.

Key points:

• M&A activity in Q1-2019 fell 7 per cent in volume terms and 54 per cent in value terms

• Domestic deals accounted for majority of the deal volume (65 per cent) and deal value (72 per cent)

• The technology sector led in terms of deal volume, while the financial services sector topped the value charts