The Covid-19 pandemic has plunged business activity into a chaotic state, with companies across the board impacted by the lockdown and its aftereffects, and revenues vanishing almost overnight. Consequently, businesses are being forced to go back to the drawing board and attempt to understand the exact impact the pandemic could have.
Amid all the gloom and doom, there’s been a steady stream of positive news for India’s largest private corporate house, Reliance Industries, owned by India’s richest billionaire, Mukesh Ambani. Ambani’s Jio Platforms, the umbrella entity for his digital-led businesses, is fast emerging as a fund-raising machine with nearly ₹98,000 crore – or a staggering $13 billion – being raised in a span of a couple of months. Beginning with a mega ₹43,500-plus crore investment from Facebook, which was followed by a flood of funds from some of the leading private equity and sovereign wealth funds across the world – from KKR, General Atlantic, Silver Lake to Mubadala and Abu Dhabi Investment Authority – Jio Platforms has been one entity which has defied the general trend during the pandemic.
The Jio Platforms fund-raising spree is, perhaps, indicative of a broader trend: behind the mayhem across businesses, Deal Street is buzzing with activity around potential transactions, with investment bankers, advisors, and private equity players working round the clock to draw up strategies for the future. The devastation wreaked by the pandemic is causing businesses to be upended by the hour, and this is expected to lead to mergers and acquisitions (M&As) and consolidation activity in the months ahead.
Manisha Girotra, investment banking veteran and chief executive of global investment bank Moelis & Co. in India, tells me that while the general trend over the next two or three quarters will be of companies budgeting for zero revenues and broken supply chains, some large companies which have extra cash will be scouting for reasonably priced deals. But with the need to conserve cash, stock-for-stock mergers will likely be the way forward as some of the larger companies acquire for scale, to gain access to new markets and to reduce costs.
Private equity to the fore
Investment bankers like Girotra tell me that while leveraged buyout by companies will not be possible, private equity (PE) funds awash with liquidity are expected to be at the forefront of M&A activity. “There’s a lot of PE liquidity, so PE-led M&A will continue. PEs will be the dominant pool of capital in India for the next 24 months,” Girotra says. PEs could also join hands with companies to carry out acquisitions in the days ahead. The comfort which PEs now have in doing control deals even in listed entities will mean that more deals will take place where such funds will be the catalyst.
Girotra’s view is echoed by most. Sanjeev Krishan, Lead-Deals at Pricewaterhouse Coopers (PwC) India tells me that already several PE funds have begun preparing a pipeline where they can invest after a waiting period during which they examine the effects of the pandemic. M&A will be the big driver as the need for capital goes up. With mounting stress, banks and financial institutions will be unable to provide the kind of capital India Inc. will need to come out of the massive disruption caused by the pandemic, and hence PE and private credit will be the way forward.
“PEs are unlikely to fork out funds for the next two or three months, but they are surely preparing a pipeline and checking out which companies have robust business models. They are identifying such businesses now so that they can eventually do those deals on the other side of the pandemic,” Krishan tells me. PE interest is expected to be very high in areas like technology, pharma, and fintech.
Sudhir Dash, a former banker who is now the founder and CEO of Unaprime Investment Advisors, a boutique PE advisory firm, says PE firms and advisors have been very busy looking at potential deals even during the lockdown, and now with the economy opening up gradually. “Globally, PEs are the only guys who have the money,” Dash tells me. However, while most of them are flush with cash, some PEs who have university endowments as limited partners (LPs) are also evaluating the situation before committing funds since such endowments are facing challenges owing to the pandemic.
The moratorium and after
Investment bankers say the moratorium on repayment announced by the Reserve Bank of India as a part of the measures to support the economy in the wake of the pandemic may provide relief to companies for now, but it will only be a temporary relief, postponing the inevitable pain. After the moratorium is lifted, several companies, burdened with the post-moratorium payments liability, will be down on their knees, and that will lead to another round of M&A activity.
In the period after the moratorium, borrowing capital will become very expensive. Companies which then need capital will be unable to bear the pain, and will need to cash out. Investment bankers reckon that this will also provide an opportunity for distressed investment funds to come into the M&A space in a big way, acquiring such stressed companies which are undergoing the insolvency process, and also buying stressed debt from banks. Larger companies with strong balance sheets will also find such acquisitions attractive since there will be significant haircuts thanks to the insolvency process. PE funds and other companies which were circling the NCLT to buy larger assets and had lost out are expected to then be interested in the next rung of midsize companies available at attractive valuations.
Big becoming bigger
The wave of consolidation which a post-pandemic world will bring is expected to have another fallout: big companies becoming even bigger. Girotra reckons the next five to ten years will be about big names, as large companies acquire others and become larger. The trend of larger companies being broken up will be reversed, and a ‘big is safer’ scenario is likely to emerge. The focus will be on strengthening balance sheets. Companies will want to conserve cash, raise capital, and even delist in the coming days as stock prices take a knock. Delisting, for instance, would give companies a breather from public markets, and time to get their houses in order before they face the glare of the markets again. With tech and related entities expected to take a quantum jump in the post-Covid scenario, smaller technology entrepreneurs will be able to survive, but there will be a wave of consolidation across other sectors, as midsize companies will find it virtually impossible to fight the larger ones and would prefer to cash out.
As several promoter-run businesses realise they cannot survive beyond a point, some of them, Krishan says, may even choose to remodel their businesses. For instance, some business-to-consumer (B2C) companies may opt instead to turn to a business-to-business (B2B) model and service larger companies to avoid the hassle of a consumer-facing model. Krishan points out that not just finances, but the ability to raise finances, and a combination of hard and soft infrastructure (by way of the right kind of management pool) will be critical in the new normal. Those companies who find they cannot remodel this way will choose to sell their businesses and unlock value for themselves.
Dash of Unaprime tells me his assessment is that textiles, real estate, hotels, and such sectors in the direct line of fire of the pandemic will see activity. “I see a maximum of six to seven real estate companies of any consequence surviving in each of the cities, while the rest will fall by the wayside,” he says. Activity will also be witnessed in areas like tech and pharma where global names will now be interested in pushing through deals which were taking time earlier. A similar consolidation push will likely be witnessed in infrastructure, with roads, energy (both thermal and renewables), and similar areas witnessing deals owing to the inability of the current promoters in these sectors to withstand the pressure. Cyclicals like downstream steel and metals will also see promoters opting out, investment bankers reckon.
Deal Street, then, is far from locked down. Behind the scenes, proposals are being discussed, timelines being drawn up and Zoom calls being scheduled. Once the dust settles, the activity is expected to gather pace. It won’t happen just now for sure, but as Krishan says, the pipeline is being prepared, and activity is expected post-September.
There’s one big plus in all this consolidation. Dash reckons with the cleansing taking place, FY22 balance sheets will look much cleaner for India Inc. If earlier a company’s balance sheet had 50% of the figures being seen as suspect, that percentage could go down sharply by FY22 and 75% of the balance sheet could be clean.
For investors, lenders and the public markets, that would be music to the ears after all the mayhem.
(The writer is Editor, Fortune India)
