M & A CritiqueThe year 2018 is seeing a lot of big-ticket mergers and acquisitions (M&As) in India by foreign companies. Till September, India has got investments worth $40.5 billion through M&As by foreign companies in the country, a 64.6% increase in deal value from comparative period of 2017, surpassing annual record volume in 2017 ($31.5 billion). Globally, investment received by India from foreign companies this year is the second highest after China. In fact, the Middle Kingdom has got marginally higher investments of $41.6 billion through M&As by foreign companies in the same period.
Some of the notable deals in India by foreign firms this year were Walmart Inc.’s $16-billion acquisition of e-commerce giant Flipkart, Amazon.com Inc. and Samara Capital acquiring stakes in Aditya Birla Group’s retail chain More. In non-retail segment, Schneider Electric SA’s acquired Larsen & Toubro Ltd’s electrical and automation business for $2.1 billion and Warren Buffett’s Berkshire Hathaway decided to invest $300 million in Paytm.
The United States is currently the top acquirer of Indian companies in terms of value and number of announced deals. The United States accounted for 56.1% of India’s inbound M&A activity followed by Canada at number two position with 10.5% share and France at number three slot with 9.3% market share. Overall, according to data from Thomson Reuters India M&A report, the value of announced mergers and acquisitions (M&A) deals involving Indian companies (inbound and outbound) reached $99.7 billion in the first nine months of 2018, surpassing the annual record of $67.4 billion set in 2007, on the back of large ticket transactions.
Shift in MNC’s focus
A host of structural, legislative and legal steps taken by the government at the Centre have helped to fuel M&A activities in India. The government rolled out Goods and Services Tax (GST), the insolvency and bankruptcy code has put dozens of delinquent borrowers on the block, spanning industries from steel to power and infrastructure and rising middle class is fuelling spending on durables, consumables and retail. All these factors have led to multinational companies shift their focus on India’s domestic market and reap the long-term gains. Moreover, technology is making a huge difference in the way companies work, especially in the fintech space, which is attracting foreign investments.
Both global online and offline players are chalking out their India strategy because the economy is growing faster than China and spending power of people is growing. Economists at the International Monetary Fund and World Bank have projected that China’s economy will slow down in the future.
However, lack of rapid job creation may affect the India growth story unless investment grows rapidly by companies.
There is another dimension to the shift of MNCs towards India. The ongoing trade war between China and the United States has affected investments by foreign companies in China and these companies are now looking at India to consolidate their base either by organic or inorganic growth.
The competition will now intensify between Walmart-Flipkart and Amazon in the Indian retail market place. In fact, the retail sector accounted for majority of the acquisitions involving Indian companies with 23.3% market share. Energy & Power and Telecommunications sector followed behind with 11.6% and 7.9% market share, respectively. In the first half of 2018, there was a ten-fold increase in deal value of around $20 billion compared to the first half of 2017, making it the highest-ever period for the sector in terms of value. The manufacturing sector attracted the most attention from foreign investors, while the potential of Indian start-ups was also showcased by three deals worth $15 million.
Walmart-Flipkart deal is done
The $16-billion Walmart-Flipkart deal, the world’s largest e-commerce deal was a major win for Walmart as the global retail giant enhanced its e-commerce capabilities and achieved a greater presence in India’s emerging market. In order to remain competitive and ensure future growth, major players such as Walmart are pursuing acquisitions beyond their traditional core capabilities and markets. Walmart paid $16 billion for an initial stake of 77% in Flipkart, valuing the e-tailer at $20 billion. The rest of the business will be held by some of Flipkart’s existing shareholders.
Walmart will retain existing management of Flipkart Group and become the largest shareholder in the country’s number one online retailer. Walmart expects India’s e-commerce market to grow at four times the rate of overall retail, and with well-known platforms, Flipkart is uniquely positioned to leverage its integrated ecosystem.
As of now, the deal looks a win-win situation for both the firms. However, only time will tell how the two companies could leverage their strengths. For one, Flipkart’s supply chain arm – eKart – at present serves over 800 cities across the country, making five lakh deliveries each day. Walmart will have to leverage the strength of eKart to make the combined entity’s delivery system more efficient. Secondly, Flipkart’s business could also get a whole lot more transparent since its quarterly results will be reported as part of Walmart’s earnings.
Amazon-More deal
The US-based online retailer, Amazon has been making inroads into India’s offline space for the past one year. In order to further consolidate its offline position in India. Amazon, along with private equity firm Samara Capital, has agreed to buy Aditya Birla Group’s food and grocery retail chain, More at Rs 4,500 crore. More is India’s fourth largest retail chain after Future Group’s Big Bazaar, Reliance Retail and DMart. At present, the brick-and-mortar retail chain runs 523 supermarkets and 20 hypermarkets. In fact, Amazon was negotiating with RP Goenka Group’s supermarket chain Spenser Retail Ltd to buy stakes but the talks failed on valuation.
For Amazon, it makes sense to get into the $60 billion organised retail in India as e-commerce still accounts for only 2% of the total retail sales, according to data from McKinsey. Amazon’s first foray into India’s offline retail started with buying 5% stake in Shopper’s Stop for Rs 180 crore in September 2017. With that stake, Amazon had set up experience centres, showcasing its brands in fashion and accessories across 80 departmental stores. Even in the US, Amazon has been making big moves offline as it made the biggest purchase ever, buying premium grocery store chain Whole Foods for close to $14 billion. The acquisition gave Amazon access to the markets in the US, Canada and the UK.
In fiscal year 2018, Aditya Birla Retail Limited’s revenue was Rs 4,400 crore, a growth of 5% year-on-year. The company’s losses came down to Rs 490 crore. With debt mounting to Rs 6,573 crore, the group has been trying to sell More. At the group level, the deal will free the company and help to focus on other key businesses including cement, finance, telecom and metals. Now, with more capital after the acquisition, More will be able to expand with more stores across the country.
Going ahead, the India story
A long-period study done by CII and PwC notes that inbound M&A accounted for 25, 23 and 29 per cent of the overall foreign direct investments into the country over the last three, five and ten years, respectively. Inbound M&A is expected to gain further momentum following amendments to the insolvency and bankruptcy codes. This is likely to result in a number of distressed assets coming up for sale at attractive valuations, particularly in capital-intensive sectors such as real estate, infrastructure, power and cement.
Overseas corporate buyers are likely to continue focus for investment in emerging markets, especially India driven by consolidation, restructuring and asset sales by highly-leveraged Indian companies. India will remain an attractive destination for foreign companies to acquire domestic companies and the norms of doing business will have to be eased so that foreign companies find India attractive and invest capital for acquiring companies and bring in efficiency in the processes.
