How Indian corporates can benefit from the euro crisis

Author: Ashley Lee | Published: 9 Jul 2012
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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