Control deals emerge as the new PE flavour in India

With Indian promoters looking to pare non-core business, more buyout deals are likely

The recent transaction of Baring Private Equity Asia to acquire mid-sized information technology (IT) firm Hexaware Technologies is termed the latest example of private equity (PE) firms signing control deals in India. According to experts, Indian promoters’ plans to sell off their non-core business would likely create a plethora of buyout opportunities for PE investors.

Shweta Jalan, managing director of Advent India PE Advisors, said: “We are certainly seeing more buyout deals in the recent past. The common themes in buyout deals are either succession issues or secondary sale from private equity investors.”

PE fund Apax Partners, along with its portfolio company iGate, acquired Patni Computers for $1.2 billion after issues over succession had arisen at Patni.

“We may see more activity as Indian business houses begin to look at divesting some of their non-core businesses to preserve or re-deploy capital to their core businesses and also become relatively less emotionally wedded to the businesses that are non-core,” said Pramod Kumar, managing director of Barclays India.

According to him, a sector such as information technology has been witnessing more control transactions from PE investors.

“We have seen that with Patni, Genpact, and now with Hexaware as well. Unlike industrial families or business conglomerates, the owners of IT services are less emotionally attached to the businesses and have taken decisions to monetise businesses more frequently,” he added.

Last week, Baring PE Asia had announced its plan to buy a controlling stake in Hexaware for up to Rs 2,745 crore (about $420 million), one of the largest deals in the Indian IT services space. After buying a 41.8 per cent stake from promoters and PE investor General Atlantic, Baring will make a mandatory tender offer to minority shareholders of Hexaware for up to 26 per cent of the company.

Vikram Hosangady, head (transaction services) at KPMG India, said: “Most global funds prefer doing control deals given their greater bandwidth, in-house domain experts and experience of a wider and larger portfolio. The Indian market hitherto was dominated by minority deals, but the experience of such investing over the last six-seven years suggests that buyout funds would be better off doing control deals as they would have greater control over their destiny.”

In July, Blackstone Group LP acquired a majority stake in auto parts maker Agile Electric Sub Assembly Pvt Ltd for Rs 650 crore. Blackstone had acquired a majority stake in companies such as Intelenet Global Services, Gokaldas Exports Ltd and CMS Infosystems. In 2011, Blackstone Group had acquired DLF Ackruti Info Parks (Pune), which owns a special economic zone, for Rs 800 crore ($149 million). According to data from VCCEdge, the year 2012 has seen 19 control deals worth $726 million. In 2013, with Baring’s Hexaware buyout, the deal size went up to $822 million from eight control transactions. Running the acquired business remains a challenge for the PE investors, which force them to keep the existing management for a smooth ride.

Mayank Rastogi, partner (private equity and transaction advisory services) at E&Y India, said, “As for the management, PE funds generally insist on the exiting management to continue post deal (after the deal is clinched). They may make some small specific changes, but the quality of existing management team is a key criterion in their evaluation of control deals. There are hardly any deals where a PE fund did a control deal and then made wholesale changes to the management team.”

Echoing Mayank’s view, Jalan said: “PE usually looks at backing management teams to buy these companies. The change usually happens if there is founder-management who is looking at an exit. In that case, we look for a new senior management team to run the companies.” In 2012, Advent International had picked up a majority stake in Hyderabad-based health care chain CARE Hospitals for $105 million (Rs 534 crore). After its transaction with Hexaware, Baring PE Asia had decided to keep Atul Nishar, founder-chairman of Hexaware Technologies, as a non-executive chairman while P R Chandrasekar would remain as the CEO of the company.

Other top control deals include Switzerland-based Partners Group's Rs 1,600-crore buyout of CSS Corp and Warburg Pincus' Rs 560-crore majority stake buyout in Future Capital Holdings Ltd.