SAPAT TEA IS a classic Indian growth story in the making. Privately run and awash with cash after a decade of strong domestic growth, the country’s third-largest tea maker and blender is on the hunt for foreign acquisitions. Armed with a war chest of more than $60 million, Mumbai-based Sapat wants to buy at least two high-end tea brands over the next 12 months – one in the US (its budget: $20 million) and one in the UK (budget: $40 million). Its management will finance the deals around 50% with cash, with the rest funded by a mixture of leveraged buyouts and, says Sapat’s managing director, Nikhil Joshi, "a sprinkling of private equity".
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"We have more capital to spend than the US firms we are looking to buy. We have good cashflow, and banks are happy to extend credit to us. Indian firms are more acquisitive than US firms, and we have a compulsion to go out and expand. We want to prove ourselves in the outside world"
Nikhil Joshi, Sapat Tea |
Sapat isn’t particularly large: Joshi declines to reveal the privately run, unlisted company’s finances, although he says that by 2010 he wants Sapat’s annual revenues to more than quadruple, to between $150 million and $200 million. But he personifies both the burning confidence of India’s family-run small and medium-sized enterprises (SMEs) – the local version of Germany’s Mittelstand – and their desire to grow rapidly and beyond their own borders. This is despite – and sometimes because of – the global credit crunch and fears of a US recession.
"We have more capital to spend than the US firms we are looking to buy," says Joshi. "We have good cashflow, and banks are happy to extend credit to us. Indian firms are more acquisitive than US firms, and we have a compulsion to go out and expand. We want to prove ourselves in the outside world."
This year hasn’t been easy for India’s turbulent market. Mumbai’s Sensex index has tumbled 26% in the year to March 12, and foreign institutional investors (FII) have been net sellers of Indian stock this year to the tune of $3.2 billion, after four steady years of capital accumulation. But that hasn’t stopped cash-rich Indian firms from eyeing overseas acquisitions. Virtus Global Partners, a New York-based boutique investment bank, noted in a March 2008 report that 83 US-bound acquisitions by Indian corporates were completed in 2007, worth $10 billion, up 73% year on year. A further 10 were completed in the first two months of 2008 – the same number sealed in the same period a year ago – mostly in the IT sector, as Indian firms look to grow and increase their global service offerings.
Most deals have been completed by relatively small Indian corporates. Although transactions such as Tata Chemicals’ $1 billion acquisition of New Jersey-based General Chemical Industrial Products in January tend to hog the limelight, they are the exception rather than the rule. Smaller deals, totalling $50 million or less, accounted for 84% of US-bound acquisitions in 2007, according to Virtus. They include the $45 million acquisition of Chicago-based IT firm Tusc by Indian rival Rolta, and the $35 million acquisition of Logic Bytes, another New Jersey-headquartered firm, by Chennai-based Kaashyap Technologies. Most smaller transactions tend to be in the information technology sector – an industry in which Indian firms increasingly dominate. But US-bound deals are also increasingly abundant in other growing Indian industries. India’s Wockhardt Hospital’s $38 million acquisition of Illinois-based Morton Grove Pharma stood out in 2007 in the healthcare industry. In the automotive sector, Ashok Leyland, controlled by India’s Hinduja family, snapped up Michigan-headquartered Defiance Testing for $17 million.
Indian corporates are also finding it relatively easy to finance overseas acquisitions. Domestic Indian lenders, traditionally isolated from the global financial markets, have found it easier to muddle through the credit crunch. Still relatively liquid, such banks as ICICI, HDFC and Axis Bank are happy to provide sizeable credit lines to leading local corporates. Many local firms also have large reserves of cash: after hoarding it for the past decade they are now drawing heavily on it. Virtus notes in its report that most overseas acquisitions by Indian firms were 100% stock-for-cash considerations. And if that’s not enough, US and European funds and private equity firms will be happy to help out: Indian firms and their local markets are growing faster than their peers in the west, while, according to Mumbai-based Yen Management Consultants, about $70 billion to $80 billion of private equity capital allocated to Indian investments has yet to be spent.
Hunted turns hunter
Investment banks such as Virtus are also lining up to help Indian corporates snap up foreign assets. The partners of Virtus, which was founded by mainly non-resident Indians, originally set their sights on advising US corporations on ways to expand into India in the technology and consumer goods sectors. But Anil Kumar, the investment bank’s founder and managing director, soon found that interest and liquidity were flowing in the other direction. "What we found was that Indian CEOs were aggressively seeking acquisition targets in the US. They had the desire and the cash but didn’t necessarily know who to buy. We had the Indian background, and we had the transactional ability and the on-the-ground presence in the US. So we started looking at viable acquisition candidates for Indian firms."
They didn’t have to look far. In 2007, Virtus helped target and finance five US deals by Indian corporates, including the $45 million acquisition of Samuels Jewelers by India’s largest listed jewellery retailers, Gitanjali Gems.
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"This year we’ll see even more Indian firms completing deals because of the stress of the US financial system. Indian firms are looking for deals that two years ago they wouldn’t have considered. And the capital is available"
Anil Kumar, Virtus |
Kumar says Gitanjali wanted a list of likely targets. Virtus talked to 15 viable candidates and slimmed the list down to five or six. "Gitanjali’s management then moved very fast," remembers Kumar. "They homed in on the companies [they liked] and had enough money on their balance sheet [to buy them]. The US jewellery market wasn’t growing quickly but it is enormous and one part that is growing [there] is the demand for Indian jewellery. The deal made perfect sense." Gitanjali has since bought two more US rivals: Tri-Star Worldwide, for an undisclosed sum, in March 2007; and Rogers Inc for $18.5 million eight months later.