M&A revival good news for beleaguered banks
The resurgence in M&A activity over the past few months, after a lull, is heartening not only because it signals that buyers are confident they will be able to sweat the assets they buy profitably, but also because it is helping companies pare debt and restore some semblance of sanity to their balance sheets. Indeed, from roads to hotels and cement plants to coal mines, companies have been selling assets or part of them both at home and overseas. Many of the purchases were made during the boom years before the global financial meltdown and were top dollar acquisitions; while many of the buyouts, albeit expensive ones, have worked well, the slow recovery in the global and home economies has left several corporates with little option but to offload those that aren’t doing so well. The latest transaction between Reliance Power and the Jaiprakash Group is a good example of how corporates are willing to deleverage even if it means selling an asset at less than attractive valuations. As analysts point out, at an enterprise value of R12,000 crore, the purchase of three hydro-power plants by the Anil Ambani promoted company is a good deal since it would otherwise have spent close to R17,000 crore creating the 1,791 MW asset going by current costs of construction.
Unfortunately, for the Jaiprakash Group, it is so heavily in debt that it needs to rustle up some cash to keep lenders at bay; in September last year, it sold a cement plant to the KM Birla Group. Beleaguered bankers, who lent too much, not having anticipated the sharp downturn in the environment, have been breathing down the more-indebted companies asking them to explore sales of assets. Research from Credit Suisse points out that thanks to pressure on operating profits, the debt-to-ebitda (earnings before interest tax depreciation) levels for India Inc have risen in FY14; despite much talk of deleveraging, for the 50 largest borrowers with an interest cover of less than one, debt levels went up by 7% last year even as the ebidta dropped by 9% resulting in the debt-to-ebitda ratio deteriorating to 14.6X from 12.3X. In this context, the Anil Ambani Group too is highly leveraged with a combined gross debt of close to R88,000 crore across three companies; the gross borrowings of Reliance Power alone are close to R28,000 crore. While the hydro-power assets are understood to be generating profits, the business owes lenders around R7,100 crore. In their eagerness to grow their businesses, promoters need to be careful not to overstretch themselves. And this time around, bankers need to be more assertive.