Big deals whet India's appetite

The buyout frenzy in India is going strong. But Is the euphoria over? Fortune's John Elliott reports.

By John Elliott, Fortune

(Fortune Magazine) -- In the first flush of nationalistic fervor that greeted Tata Steel's $13.6 billion takeover earlier this year of Corus, the British steel company, there was so much foreign acquisition talk by Indian companies it seemed as if herd instinct had replaced financial caution.

The Aditya Birla group made a $6 billion bid to buy Novelis (Charts), a Canadian aluminum company, and Suzlon, a wind-power company, offered $1.6 billion for REpower, a German turbine maker. Ranbaxy, one of India's top pharmaceutical companies, which has spent $500 million acquiring 14 companies abroad since 2004, joined the bidding for the generics business of Merck (Charts, Fortune 500), a German pharmaceutical company, at about $5 billion. Then Reliance Industries, one of India's two largest groups, was reportedly in talks with three U.S. companies - Dow Chemical (Charts, Fortune 500), Chevron (Charts, Fortune 500) and GE (Charts, Fortune 500) - and two European retailers, Carrefour and Sainsbury, about possible deals.

But for all the talk, only the Birla deal looks certain. Suzlon is facing opposition from France's Areva, Ranbaxy has pulled out of the Merck bidding, and nothing has come, as yet, of any of the Reliance rumors. That may have something to do with the Indian stock market's negative reaction, driven in large part by concern that valuations of takeover targets are too high. Tata Steel's shares dropped more than 11 percent from their year's high, though they are now recovering. Hindalco, Birla's aluminum company, fell 13.8 percent the day after the takeover was announced and has dropped another 3 percent since.

Seasoned bankers say the markets are not taking a long enough view of Indian companies' capabilities. In the short term, says Nimesh Kampani, chairman and managing director of JM Financial, a leading Indian investment bank, such deals "may not look like value to Indian shareholders, but in the medium to long term all the shareholders will benefit." Provided, he adds, that the businesses are integrated effectively and cash flows are used to restructure debt.

Both Tata and Birla are cushioned by substantial internal cash reserves that will enable them to cover debt taken on with the acquisitions, says Kampani, but companies that aren't part of large diversified groups, such as Ranbaxy or Suzlon, "have to be much more careful in foreign acquisitions."

Still, the pressure on these and other Indian companies to go global will continue. So far this year, 34 foreign acquisitions totaling $10.4 billion have been reported by Indian companies as completed or pending, according to Dealogic, a British research firm. That is almost half of the $23.1 billion total for all of last year.

Indian companies have two targets abroad: businesses that enable them to grow beyond India and become globally competitive, and those that add value in terms of markets, brands, technology or raw materials. In the first category, globalization is forcing companies to choose what to do because they could be vulnerable to foreign takeover bids in a market downturn.

"Scale is a key competitive weapon," says Rajeev Gupta, Indian managing director of Carlyle, a U.S. private-equity firm. "You have to have scale working for you, and that will lead some companies to sell and some to buy. All the top family companies are clear that they have to make choices."

Both the Tata and Birla deals fall into that category. But both companies are also gaining access to foreign customers. Once the Corus deal goes through, Tata will have well over half its revenue coming from outside India. It has spent more than $15 billion on 27 foreign acquisitions and minority stakes since 2000, including the purchase of Britain's Tetley Tea. That move transformed a grower of tea into a consumer-oriented beverage company that owns, among other things, a 30 percent stake in Energy Brands, the U.S. maker of Glacéau vitamin-enhanced water. "Tata Tea had the raw materials," says Pradip Shah, chairman of IndAsia, a private-equity firm. "But it needed to add value by getting into outside markets and other products, which it has done."

Shah and others say that despite the market reaction, foreign takeovers are an "irreversible trend" because Indian companies have the financial resources. "There might be one or two cases of excessive zeal," he says, "and the stock market might react badly, but value will be built."  Top of page