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Beyond Taj Mahal13/12/2006. Source: Asia Private Equity Review (APER).
 Indian companies are assuming a role on the global private equity divestment scene, says APER. For more than half a century, the notion of going global has been an alien subject to Indian corporations.
Since 2000, when Tata Group mobilised US$430.4 million to take over the UKbased Tetley, the world’s second largest tea company, Indian establishments have been diligently following Tata Group’s footsteps in making their imprints on the global mergers and acquisitions scene.
In the first four months of the year, there were 47 announced overseas acquisitions by Indian companies with an aggregate value of US$2.2 billion. This is 60% of the US$3.7 billion recorded for 2005, and has exceeded that for the entire 2004, which recorded US$1.53 billion (fig.8).
Unbeknownst to Indian companies, as they fortify their assets through a global acquisition agenda, they have increasingly assumed a key role on the global private equity market stage, as they have become one of the most willing trade buyers of private equity assets managed by fund management firms outside of India (fig.9).
The Launch Platform
The first time that an Indian behemoth made its mark in the divestment scene of an Asian private equity portfolio company was in August 2004. India’s number two steel maker, Tata Iron & Steel Company Ltd. (‘Tata Steel’) had identified the Singaporebased NatSteel as its target for its maiden overseas acquisition.
At the time when Tata Steel had its eye on NatSteel, the latter had just completed a new shareholder structure some 18 months previously when 98 Holdings paid S$770 million (US$437.5 million) in taking up 51.23% of the company. 98 Holdings enlisted two private equity investor groups, GEMS Ltd. and Standard Chartered Private Equity (‘consortium’) as its shareholders. It is understood the combined payment made by the consortium in this deal was in the vicinity of US$35 million.
In August 2004, Tata Steel made it known that the acquisition of the core assets of NatSteel would mean a "significant" step in its quest to enter the global playing field. In acquiring NatSteel’s mills, it would add an additional 2 million tonnes to its domestic capacity of 7.5 million tonnes.
To shareholders of NatSteel, Tata Steel’s offer was attractive and came at a time when the new shareholders of NatSteel were unable to lift the company’s profit margin, after having been in the driver’s seat for nearly 18 months. In the first half of 2004, NatSteel’s profit from operations declined by 3% to S$21.8 million.
In a cash payment that amounted to S$486.4 million, Tata Steel took over NatSteel’s principal source of income, the still mills in Singapore, China, Malaysia, Vietnam, the Philippines, Thailand and Australia. Together, these operations accounted for some 82% of NatSteel’s 2003 revenue, 47% of pretax profit and half of the net asset value. NatSteel’s shareholders were left with its non-steel businesses, which included petro-chemicals, engineering and construction products, as well as property and investment businesses. For private equity investors, the investment in NatSteel has been a rewarding venture.
In the first year since taking over the boardroom of NatSteel, the company paid a special dividend of S$0.55 per share. A portion of the net proceeds coming from Tata Steel, after a debt payment of approximately S$20 million, were distributed to NatSteel shareholders. According to GEMS, it has tripled its invested capital in NatSteel, recording an impressive internal rate of return of 50%. It would be questionable whether such an impressive return could be achieved without Tata Steel’s S$486.4 million cash payment.
Going Global
In the first five months of the year, Indian companies further enhanced their profile in the global private equity scene as they pursued their soaring ambitions, especially in the life sciences sector. In 2004, the aggregate value of international takeovers by Indian pharmaceuticals stood at US$139 million, which then jumped to US$341 million in 2005. But in the first four months of this year, the figure has skyrocketed to US$904 million. In the quest to overcome patent barriers at home, India’s leading pharmaceutical companies are aggressive buyers of assets in some of the largest and promising markets in Europe. In early March, Dr Reddy’s Laboratories (‘Dr Reddy’s’), an icon in India’s pharmaceutical industry, acquired the German-based betapharm Arzneimittel.
This fourth largest generics company in Germany was in fact backed by the UK-based 3i Group, which committed 300 million euros (US$356.2 million) to a management buyout of the drug maker. In the same year, bethapharm Arzneimittel reported a revenue of 161 million euros, a significant jump compared to 50 million euros posted in 1999. When Dr Reddy’s sealed the deal by paying 489 million euros to assume full control of betapharm Arzneimittel, it was the largest overseas transaction by an Indian pharmaceutical company. It was also the second acquisition by Dr Reddy’s in a matter of six months. Earlier, it committed US$59 million to buying Roche Holding AG’s drug ingredient- making unit in Mexico. The acquisition of bethapharm Aezneimittel, which has already captured a market share of 3.5%, will give Dr Reddy’s a foothold in Germany, Europe’s biggest generics market. Interestingly, private equity capital played a prior role in Dr. Reddy’s before it embarked on its global acquisition trail. In March 2005, ICICI Venture Funds Management and Temasek Holdings had jointly injected a total of US$56 million into Dr Reddy’s. At the time when Dr Reddy’s was consummating its takeover of bethapharm Aezneimittel, another Indian pharmaceutical company, Ranbaxy Laboratories Ltd. (‘Ranbaxy’) was also engaged in the acquisition of a drug making company. The arch rival to Dr Reddy’s, Ranbaxy acquired the Romanian-based Terapia SA, the third largest pharmaceutical company in the country.
Terapia was controlled by private equity interests. In August 2003, the Boston-based Advent International took up a 90.7% equity stake in Terapia for US$44 million in Romania’s first public-to-private leveraged buyout. Ranbaxy paid US$324 million in assuming virtually full control of Terapia. The amount valued Terapia at 11.6 times the company’s earning before income, tax, depreciation and amortization for the period just 12 months prior to the acquisition. For Ranbaxy, the acquisition of Terapia fits into its pan-Europe charter. Romania is the fastest growing pharmaceutical market in Central and Eastern Europe. Since 2002, it has been enjoying an annual growth of 34%. For Advent International, Terapia is one of its most celebrated investments, thanks to a willing buyer from India.
Like Dr Reddy’s, it was not the first time that Ranbaxy encountered private equity players. In December 2005, Ranbaxy sold its fine chemical and animal health and diagnostic businesses agriculture to ICICI Venture Funds Management for 480 million rupees (US$11 million). Outside the pharmaceutical area, Indian companies are eagerly prowling for assets that would assist with their overall corporate development. Suzlon Energy, the world’s sixth largest wind turbine maker, which owed its growth and development to Citigroup Venture Capital International and subsequently ChrysCapital, made its first international acquisition in April this year. The seller was the direct investment arm of Allianz Group, Allianz Capital Partners GmbH.
In May 2004, Allianz Capital Partners acquired the Belgian-based Hansen Transmissions International NV (‘Hansen’) from Invensys for 132 million euros. Suzlon Energy brought Hansen to come under its corporate umbrella, placing an enterprise value of 465 million euros or US$564.23 million on this world’s second largest producer of wind turbine gear boxes. It was the largest undertaking outside of India by a domestic company since Dr Reddy’s acquisition of bethapharm Aezneimittel. Significantly, the payment has handsomely rewarded Allianz Capital Partners for its two years investment efforts, thanks to the Indian buyer.
Most recently, India’s United Breweries Group (‘UB Group’), the world’s third largest spirits producer, came close to being another Indian corporate giant that would acquire assets from private equity investors. In the bid for French champagne Taittinger, UB Group offered US$600 million, a price that stunned private equity titans CVC Capital Partners and Bulter Capital Partners. Last year, Starwood Capital Group LLC took over Group Taittinger and Société du Louvre, in the largest buyout deal in Europe for 2005 with a value of 2.6 billion euros. Although Starwood Capital has chosen to sell Taittinger to Credit Agricole du Nord-East for about 660 million euros, this bid by UB Group is nonetheless an indication of Indian corporations’ readiness to scout for assets, even facing some of the most formidable international financiers.
Observation
During the past fleeting 12 years since India shed its cocoon economy structure, its foreign reserves have reached a healthy US$163 billion, an impressive 77% increase from the US$92.3 billion recorded in September 2003. In the fiscal year ending March 2006, India recorded an economic growth of 8.4%, surpassing the original forecast of 8.1%. At home, Indian corporations are equally enthusiastic in buying private equity-backed assets. Since 2004, 89 divestments were known to have taken place, with trade sales being the mostfavoured exit route. While foreign investors accounted for nearly 60% of the trade buyers, local corporations took up a substantial 33% (fig.10). India was once simply the recipient of private equity funds, especially from multilateral organisations. Now the country’s enterprises have fast become the buyers of global private equity assets. No Asian market has been able to embrace private equity in such an encompassing fashion as India.
Asia Private Equity Review (APER) is the foremost voice on matters related to private equity/venture capital in the region. Well-recognised as being the singular source for accurate and timely news, in-depth analysis and global perspectives, APER is published by the Hong Kong-based Centre for Asia Private Equity Research. For further information please visit their website at www.asiape.com or email them at info@asiape.com
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