Indian corporates have historically looked
towards Europe for acquisitions. Practitioners at IFLR’s India Outbound Investment Forum explained how they can
exploit the euro crisis.
The current environment in both India and
Europe has rendered large M&A deals unlikely. However, Indian corporates
are well-placed to make strategic acquisitions throughout Europe.
Wilton Henriques, executive vice president
and global head of legal, governance and risk at Indian multinational, Crompton
Greaves, advised not to dismiss countries perceived not to be ideal for
investment, because there are opportunities everywhere. “A crisis always
presents an opportunity,” he said. “It’s an approach of cautious optimism,
based on whether you can extract value from the target and whether it’s
relevant to your business portfolio.”
Practitioners expect distressed companies
to be up for sale, and predicted undervalued companies would lure Indian
investors. Sudipta Routh, partner at Luthra & Luthra said this was the best
time to look out for fire sales. “As Indians, we love fire sales,” he said. “We’re
good at it and know how to judge value.”
This is a trend unlikely to end in the near
future. Mark Poulton, partner of Clifford Chance London, said that European
banks are under increasing regulatory capital burdens and are going to be
increasingly reluctant to ‘extend and pretend’ in stressed situations. He
predicted more restructurings and more businesses coming onto the market, and expected
a relatively sustained period where there are going to be opportunities at
reasonable prices.
But Poulton’s colleague, Dusseldorf-based
Clifford Chance partner Cristophe Witte, noted warning signs about difficult
assets. “If assets are more difficult, auctions will be more flexible,” he
said. “The first time a bid deadline is postponed, you can take a bet on whether
this asset will be sold.”
For those looking for safer investments,
Witte outlined several options. He said that uncertainty makes private equity
players more likely to sell businesses, and at acceptable prices. He also noted
that there are number of opportunities where major corporates are spinning off
or carving out non-core activities that may be good additions to businesses
that Indian corporates already have.
However Witte noted that European
family-owned businesses would be a cultural fit for Indian family-owned
businesses. He said that the European market, particularly the German market is
dominated by family-owned businesses set up in the 1950s and 1960s. Their owner-operators
are coming to retirement age and some have no real succession plans.
Though private equity funds are eager to
pick up these businesses, the business model that foresees an onward sale or
IPOs often does not fit with the values of owner families, who are looking for
a long-term solution. Instead, Witte said that Indian corporates with
family-owned backgrounds have shared backgrounds with family-owned businesses
and may be good buyers. “It takes preparation, trust-building and pre-deal
investment, but if it works, it works very well,” he added.
But Witte added that deal certainty is
integral. “Financing and antitrust are the most important issues and you need
to have your ducks in a row,” he said.
Witte also advised investors not to rely on
their purchase agreements, and instead be comfortable with their due diligence.
He said if there are uncertainties, try to price them in somehow, especially if
there is a lot of risk. Corporates are very restricted in giving comprehensive indemnities, he emphasised.
But investing in the Eurozone also involves
risk, especially in countries that leave the Euro and must redenominate their
currency. Routh explained that if currency is redenominated with capital and
exchange controls, the repayment of acquisition financing could get distorted
unless a good hedging strategy was in place. “The risk changes with every
passing week,” he said. “After Greek elections, it became a medium probability
high-impact risk. This makes a deal expensive, and sometimes there is no
hedging product out there that can cover this risk.”
For more from IFLR’s India Outbound Investment Forum:
Indian natural resources M&A: what lawyers want to see
India outbound M&A financing: Why corporates should look beyond LBOs
India M&A: how to handle the aftermath of an outbound acquisition