M&A activity in India drops by 8% yoy, says EY

Cross-border activity at heightened levels compared to last quarter

M&A activity in India moderates in second quarter, after witnessing a strong start to the year but reported a healthy growth compared to the same period last year.

According to EY's recent Transactions Quarterly report, deal volume for the quarter stood at 190 deals with a total disclosed deal value of $7 billion. The deal volume declined by 8% as compared to the corresponding quarter last year.

However, the aggregate disclosed deal value increased by 14% from $6.1 billion in 2Q15, predominantly due to four mega deals ($500 million and above), which contributed $4 billion and accounted for 57% of the total disclosed deal value during second quarter of 2016.

While in number of deals, technology sector-led with reported 23 deals, followed by infrastructure, retail and consumer products sectors which clocked 18 deals each, but on the value front, the infrastructure sector led with $2.8 billion.

Amit Khandelwal, partner and national director, Transaction Advisory Services, EY said: "While the relative softening in deal activity reflects the overall tepid nature of the global M&A market, the deal activity was more pronounced on the domestic front on account of some mega deals and driven by a need to consolidate. Inbound activity also saw an increase owing to global investor's continued interest in India. We expect the M&A activity to remain stable over the coming months."

Domestic activities continued to dominate the Indian M&A transactions, with 103 deals with an aggregate disclosed deal value of $4.9 billion reported in Q2. This contributed 54% to the total deal volume and 70% to the total disclosed deal value.

Contribution in disclosed deal value can be largely attributed to a few mega deals. The largest deal involving home-grown companies during the quarter was the announced acquisition of Welspun Renewables Energy Pvt Ltd by TATA Power Renewable Ltd, for $1.4 billion.

In another deal, JSW Energy limited announced to acquire Jindal Steel and Power Ltd's 1,000 Mw power plant in Chhattisgarh, for $977 million.

These big-ticket transactions, especially in the power sector, were distressed asset sales by leveraged corporations to deleverage their balance sheets.

"These deals are anticipated to gain further prominence in coming months, with banks' stringent view on non-performing assets," according to the report.

Domestic deal activities were also driven by the Indian corporates' focus on maintaining competitive advantage and strengthening their core businesses. Consolidation deals, especially in sectors including e-commerce, retail, financial services and pharmaceuticals, is also expected to support domestic deal activity.

Cross-border

Transnational M&A activity involving Indian companies increased in second quarter of 2016 as compared to second quarter of 2015. While the deal volume witnessed a marginal decline (87 versus 93), the deal value jumped to $2.1 billion for the quarter, up 87% from $1.1 billion in 2Q15.

There were 56 inbound deals during the quarter, which contributed $1.3 billion to the disclosed deal value as compared to 53 deals accounting for $647 million in 2Q15.

On the other hand, the marginal drop in the overall cross border deal volume was on the outbound front, which slowed to 31 deals from 40 deals in the same period last year.

But, the outbound deal value increased to $856 million from $492 million in 2Q15, up by 74%, a year ago. Two deals contributed $669 million, accounting for 78% of the total outbound deal value.

UK topped the deal value table for the quarter with $841 million, driven by two large deals which contributed $743 million (88% of the India-UK cross border deal value) with a total of 15 cross-border transactions (eight inbound and seven outbound). In terms of deal volume, the US continued to be the most active cross-border M&A partner for Indian companies during the quarter, with a total of 21 deals (14 inbound deals and 7 outbound transactions).

According to EY report, which said that the overall deal momentum may face a period of uncertainty in the near-term, due to continued economic and political uncertainties in global markets. While long term implications are unclear, investor confidence and business sentiment is expected to be impacted in the short-term, which would lead to companies going slow on planned deals. Nevertheless, with the long-term outlook on India remaining robust, the activity should pick-up pace once the global political and economic scenario becomes more settled.