Tuesday, January 30, 2007

Barbarians at the ( India ) Gate...?

If the bidding frenzy for Hutch Essar made interesting read, it was much more intriguing to read about Ranbaxy and Cipla being wooed by bigtime PE funds like KKR, Blackstone and other usual suspects for the generics business of Merck at a perceived valuation close to $ 5.1 billion – as a consortium. While the PE funds bring in the money in a mix of equity & leveraged debt, the Indian companies are expected to provide management expertise.

We’ve heard about the biggest buyout deals by PE funds in healthcare and real estate in the US, though. KKR and others bought hospital company HCA (NYSE: HCA - news) for $33 billion, breaking the $30.6 billion LBO record that KKR established in 1988 with its takeover of RJR Nabisco. The record was broken again when Blackstone and other investors bought Equity Office Properties Trust for $36 billion.

How long would it take for the PE attention to turn towards lowly geared Indian Public companies…? What will it portend for Indian retail investor…?

Imagine a Reliance Industries, Infosys, Wipro, Telco, Tisco going private…? Then to go into PE hibernation for about 3-5 years, dole out large dividends with leveraged debt before re-emerging with more vigour and higher valuation in the public markets again…? Not farfetched. Rather it’s a snap job given their relatively low market cap vis-à-vis that of the US corporate majors which have been gobbled up already.
It flashed across my mind as I read the news “Essar Group to exit from Indian bourses”. The cost of the acquisition of shares will be in excess of $ 435 million, a back-of-the-envelope calculation showed. This is small change for the Ruias ( majority holders of Essar ), who are expected to get around $ 1.3 billion if and when Hutch Essar, in which they own 33%, is sold to the highest bidder.

Going by the trend, I wonder is it not being signalled by the string of PE buyouts in Indian Companies big and small, the latest one being Blackstone investment of $ 275 million in Ushodaya Enterprises Ltd (UEL), a large media and film production company owned by Ramoji Rao,

P.V.Shahad’s VC Circle reports this is probably the largest deal in the Indian media and entertainment business. UEL is also raising bank financing of $190 million, which takes the total fund infusion to $465 million.

In the US, Managers of companies bought out by private equity funds are seen resorting to savage cuts to pay the interest on huge debts taken on to finance the deals and give pay-back to the private equity owners, meanwhile allegations of collusion to force down buyout prices are being made against private equity companies KKR and Blackstone.

2007 could be the year when private equity chickens may come home to roost. But should you buy when Private Equity sells ?

While Regulators on both sides of the Atlantic are investigating the sector, class action law-suits against private equity firms for collusion in the US are being initiated, and some deals are beginning to unravel messily. SEBI had better keep a close watch.

As the year closed, private equity firms took perhaps the ultimate step toward joining the business mainstream. On Dec. 26, 11 firms formed a Washington lobby group, The Private Equity Council. Private equity firms have begun to come under closer scrutiny, as the size of deals they pull off has soared and the amount of money they wield has grown. Success always comes with a price. In this case, it's attention.

Did you hear the doorbell...?
Wait - it could well be Barbarians at the (India ) Gate !

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