Consolidation in the domestic market drove the deal activity: Report

The overall deal activity in Q1 2017 witnessed an unprecedented three-fold year-on-year (y-o-y) increase in value terms, according to a report by Grant Thornton India.

It was solely driven by the Vodafone-Idea mega merger, which contributed more than 80 per cent of the total values. Without this mega deal, which is estimated to be a USD 27 billion, the deal activity would have recorded 39 per cent decline in values.

"The Indian deal activity was dominated by big-ticket mergers and acquisition this quarter. The quarter witnessed one of the largest deals in the country with Vodafone and Idea's merger, which is estimated at around USD 27 billion. The quarter recorded USD 33.7 billion across 300 deals marking a sharp increase in value as compared to USD10.9 billion in Q1 2016 while volumes declined by 27 per cent," says Prashant Mehra - Partner at Grant Thornton India LLP.

M&A transactions were alone valued at USD 31.5 billion demonstrating a four-fold growth. "Primary driver for M&A growth was consolidation in the domestic market with deal values growing by 10x on the back of healthy capital markets and easing credit conditions. This enabled companies strike big ticket deals either to slash debt or consolidate market share. Cross-border deal activity is yet to pick up pace in 2017 as compared to previous quarters due to looming uncertainties in the global economy," adds Mehra.

Consolidation in the telecom sector due to increasing competition drove deal activity in Q1 2017, with the sector contributing over 87 per cent of total deal value. The quarter witnessed three mega consolidations led by Vodafone India's merger with Idea Cellular followed by Bharti Airtel's acquisition of Tikona Digital Networks Pvt Ltd's 4G business for USD 244 million and that of Telenor (India) Communications Pvt Ltd for USD 235 million.

Start-ups continued to drive M&A deal volumes contributing to 22 per cent of total deal volumes. Apart from consolidation in the telecom sector, big-ticket M&A deals materialised in sectors like pharma and energy. Overall, transaction values were driven by more than 14 big ticket deals (over USD 100 million) which contributed to over 96 per cent of the M&A values.

In contrast, absence of big ticket investments in Q1 2017 in PE space drove investment values to the lowest in the last 11 quarters. This quarter recorded only four investments valued at and above USD 100 million, as compared to seven deals in Q1 2016.

Private investment activity started on a tepid note in Q1 2017 with private equity deal-making remaining weak as venture capital firms turned cautious about backing start-ups in the first three months, recording over USD 2.1 billion which is 30 per cent fall compared to Q1 2016.

"Interestingly, in an environment with reducing investments from larger VC and PE players, we witnessed an increasing number of smaller angel and seed-stage investors backing start-ups, as compared to levels seen in the previous quarter. In contrast, companies looking at larger investments may struggle to find investors in the coming quarters," points out Mehra.

M&A activity in 2017 is expected to stay positive owing to the sustained interest in the Indian economy. "A focus on consolidation and expansion is set to be the major theme that will drive the deal activity, especially in healthcare, telecom, e-commerce and infrastructure sectors. In financial services sector, the possibility of new business models emerging post demonetisation, continued fund raising by NBFCs and a consolidation push by micro finance firms will play a big role," says Mehra