M&A in India: Trends & Strategies

October 2007

Strictly Private and Confidential

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Table of Contents

1. India M&A: Overview & Trends

2. Buy-side considerations

3. Approaches to Valuation

4. Financing Acquisitions

5. Sell-side considerations

1. India M&A: Overview & Trends

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India M&A: Overview and Trends

Record M&A activity expected this year on the back of a spurt in X–border activity

Underlying themes driving M&A in India include

– Foreign buyers acquiring Indian capacity/capability

– Domestic consolidation as large scale of operations become increasingly important

– Increasing appetite of Indian companies to look at international M&As

– Significant private equity capital to be invested

– Minority buyouts of existing listed companies

The availability and access to capital, coupled with high valuation of Indian companies, is a significant driver fuelling out-bound M&A

– De-leveraging of balance sheets

– Robust capital markets

– Emergence of Leverage Finance

M&A Trends

Source: SDC as on September 6, 2007

Since 2005, M&A activity has been on an upswing in terms of value, # of deals and deal size

Private Equity Trends

421 258 5171,469

5,158

12,423

6,702

4853

28

56

109101

79

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2001 2002 2003 2004 2005 2006 2007YTD

20

40

60

80

100

120

Transaction Value (US$mm) # of deals

4,7978,250 6,388 6,457

25,342

59,59462,242

701698585

713

1,185

1,418

904

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2001 2002 2003 2004 2005 2006 2007YTD0

300

600

900

1,200

1,500

Transaction Value (US$mm) # of deals

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India M&A: Overview and Trends

Inbound M&A Volume

Source: SDC as on September 6, 2007

Outbound M&A has acquired size and scale – in fact, exceeded inbound M&A in 2006

Outbound M&A Volume

Sectoral Breakdown (Sector, Volumes in US$mm, %)

2005 2006

Increasing value of transactions

Energy, 3,340 , 13%

IT/ITES, 1,391 , 5%

Pharmaceuticals, 1,324 , 5%

Auto/Auto ancillaries, 599 ,

2%

Financial Services, 911 , 3%

Metals and Mining, 919 , 3%

Cement, 1,457 , 6%Telecom, 5,751 ,

22%

Others, 10,753 , 41% Energy, 5,967 , 10%

IT/ITES, 3,776 , 6%

Metals and Mining, 17,102 , 29%

Financial Services, 1,418 , 2%

Cement, 1,365 , 2%

Pharmaceuticals, 2,318 , 4%

Others, 12,473 , 20%

Telecom, 16,043 , 26%

Auto/Auto ancillaries, 403 , 1%

3

1316

49

5

16 18

65

10 9

19

64

0

10

20

30

40

50

60

70

1000+ 500-1000 200-500 50-200

2005 2006 2007YTD

1,834 1,909 3,199 3,175

8,473

34,928

10,469

233256

178204

312

363

237

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2001 2002 2003 2004 2005 2006 2007YTD

100

200

300

400

Transaction Value (US$mm) # of deals

193 1,218

4,205

20,597

9221,750

24,469

168

233

163

108

4748

90

-

5,000

10,000

15,000

20,000

25,000

30,000

2001 2002 2003 2004 2005 2006 2007YTD

100

200

300

400

Transaction Value (US$mm) # of deals

2. Buyside Considerations

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Buyside Considerations

Advantage of hiring advisors

Know your audience

Know why you want the company

Know how you will value it

Know how you will pay for it

Effectively have the answers to the sellers questions

Keep it friendly and sell yourself

Earn Credibility - Establish very early in the process that you are a serious, committed and capable buyer.

Be Flexible - Winning buyers in the recent past have exhibited a high degree of flexibility and creativity in getting deals done.

Listen to the seller– focus on their issues– what is important for them– remember there is often more than one

stakeholder

Accommodate them when reasonably possible

Issues they may have– ability to close/timing/certainty– tax/form of consideration– other stakeholder issues

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Buyside Considerations

Risk taking is ok when measured and balanced against the rewards

The risk taker is often advantaged because he is addressing the sellers needs

Examples:– Less than full due diligence– Limited reps/warrants/indemnities– Foreign exchange– Government and regulatory approvals

Measured Risk Taking - The ability to “take a call”on open diligence issues and less than perfect information can often swing deals.

Market Perspective to Valuation - Control and synergy transactions have witnessed ‘premium’ valuations that are significantly higher than normal market comparables.

This is not a budgeting exercise

This is not a project which needs to exceed a corporate hurdle rate

This is a strategic move whose total potential value to the organization needs to be determined

Look at the upside and EPS accretion

Assess the value of the synergies

Use a WACC driven by the opportunity

This is not an exact science

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Buyside Considerations

Figure it out upfront before you start

Know the stakeholders and their needs

Know what you want and what its worth to you “AND OTHERS”

Assess the competition

Have a complete team in place so that you can move quickly

Complete Game Plan - It is important to be clear about the internal decision-making apparatus upfront; a small empowered cross-functional group can prove invaluable.

Sell Yourself- No longer a ‘bottom fishing’ buyers market; Assets seeking and commanding premium valuations.

When– before, during and after

To Who– Target stakeholders

ShareholdersBoardManagementEmployees/unions

– Government/regulatory agencies– Press/investment community – Your stakeholders

What– the story

focussed, clear, simple and defendable

3. Approaches to Valuation

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Precedent Transaction

Multiples approach

Comparables Trading Multiples

Approach

Discounted Cash Flow Approach

Valuation Method

Approach

Valuation MethodologiesA combination of approaches could be deployed in order to determine the optimum value for a target. Cash Flow visibility, maturity of operations and growth prospects would be considered to determine the approach.

To build a bottom-up financial model to project cash flows and carry out a DCF valuation

Suitable for a “change in control” transaction

Existing listed companies in the industry are considered to ascertain benchmark multiples

Price/ Earning, Price/Earnings to Growth, EV/ EBITDA multiples are commonly used

Specific industry multiples are also used for benchmarking – E.g. EV/Tonne in Cement, EV/ Subscriber in Telecom

Suitable for public market valuations

Precedent transaction pricing in the industry are considered to ascertain benchmark multiples

Price/ Earning, EV/EBITDA & EV / Revenue multiples, or premium to listed prices, are considered - generally at premium to traded valuations

Lack of appropriate and adequate data points may limit applicability of this approach

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Valuing Synergies

Revenue Synergies– Access to new markets, clients– Cross-sell new products/ services to the existing clients of the target/ acquirer– Enhance delivery, manufacturing and technological capabilities– Consolidation could lead to improved pricing power in the market

Cost Synergies– Economies of “Scale” and “Scope” impact many cost items favorably

Improve utilization of the combined capacityScope of rationalizing common resources – SG&A, R&D expenses

– Stronger bargaining power with suppliers and may be able to command better prices for inputs– Transfer of production to lower cost locations such as India

Need to determine how much of the potential synergies are paid for– Largely determined by competitive intensity in the process

Buyers may need to be ready to pay a higher price than the value of standalone business. The quantum of the difference could be attributed to potential synergies, which may need to be priced taking into account the competitive tension for the asset.

4. Financing Acquisitions

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Debt Financing for Acquisitions

M&A transactions typically are structured as transfer of shares from a seller to buyer– Most tax efficient structure across jurisdictions

LBO financing in India is challenging due to – Financial assistance laws– Regulatory restrictions on share financing– Absence of alternative investors

Most transactions have been funded in the offshore markets– Possible for inbound and outbound situations

Inbound X-border M&A Financing, though challenging, can be structured – Needs to be structured as a share financing in offshore holding company– Debt servicing from dividends / share buybacks– Limits the quantum of debt given that servicing is off PAT and not EBITDA– Regulatory approvals required for pledge of shares– Limited number of tranches due to structural complexity and effective subordination to operating company level

debt

Debt, both recourse and non-recourse, can be raised in offshore markets for cross-border transactions; challenging for local M&As

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Debt Financing for Acquisitions (cont’d.)

Outbound M&A Financing has been tested in significant recent transactions and lenders/investors have exhibited adequate appetite for such financings– Debt provided typically in offshore step-down subsidiary of the Indian company– Could be structured as 2 tranches – at the target level and at the parent level– Target level tranche could be structured as a traditional LBO (depending on the jurisdiction of the target) i.e.

lender’s have access to target cashflows for servicing– Parent level debt is structured with a guarantee from the Indian company under the JV/WOS guidelines

(aggregate permitted limit is 4 times Networth); Security on Indian assets can be provided to offshore lenders only with RBI approval

– Can be tranched and placed across senior, second lien and mezzanine markets depending on the extent of leverage required

Leverage levels range between 3 to 6.5x (Debt to EBITDA multiple)– Equity of 25-30% of transaction value is expected

Indian companies are on their way to establishing themselves as credible issuers/borrowers in the global acquisition financing markets.

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Offshore Acquisition from India – Typical Structure

IndiaCo / Acquirer

Overseas SPV I

ECB Lenders

SPV IINon-Recourse Lenders

Guarantee to ECB Lenders

Target

Purchase consideration for acquisition

Debt markets

Recourse

Non-Recourse

Loan / Bond

Equity Investment or Loan to SPV I

Loan / Bond

Equity Investment or Loan to SPV II

Color denotes either option

ONSHORE

OFFSHORE

Loan / Bond

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Partnering with Private Equity Players

Benefit from the experience of the PE players– M&A Process, Negotiations– Establish credibility

Certainty of capital– During the bid process and post acquisition, PE firm can infuse capital on a short notice depending on the need

and the objective

Structuring Flexibility– Investment at the parent level– Investment at the SPV level i.e. in the overseas entity acquiring the target

Restructuring post acquisition– PE firms may be familiar with local laws and regulations– Better understanding of the culture, work ethics in the country of the target– Likely to have local contacts, influence which could help in the conduct of business

Leverage global portfolio companies

Apart from the capital, PE players can add value in multiple aspects as partners in the acquisition process

5. Sell-Side Considerations

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Asset Monetization Considerations

Businesses need focus and resources to survive and maximize shareholder value in the ever-increasing competitive landscape– Globally, companies are divesting their interests in non-core businesses in a bid to focus on core businesses

and capture value in the non-core businesses before they lose their attractiveness

Opportune time to harvest interest in businesses– Participate in global consolidation

Eg. Matrix/Mylan, EDS/Mphasis– Increasing tendency amongst the owners to pass the mantle to a buyer who has the wherewithal to take the

business to a new trajectory

Valuations are at an all-time high across the industries and geographies– Unprecedented liquidity created by tremendous buy side interest both from strategic and private equity players

Exits can be structured to retain part-upside in the business– Promoters/ management could retain part of their stake and possibly take new roles under the new ownership– Private equity players keen to partner with existing high quality managements in order to jointly create value for

the business (Eg. Blackstone/Intelenet)

Current valuations and buyer interest presents an ideal opportunity for logical sellers to exit, or for diversified businesses to monetize non-core assets.

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M&A Process AlternativesDepending on the type of asset, timing and resource considerations, an appropriate sell process could be adopted

Three months or less

High degree of flexibility to change course during process

Small competitive auction

Limited high-level discussions without prior dissemination of marketing materials

Usually up to five

High-level approach to selected prospective buyers

Targeted Sale Public AuctionControlled Sale

Five months or moreThree to five monthsApproximate Time to Announcing

Very limited degree of flexibility to pull back once public process is initiated

Limited degree of flexibility to change course during process

Flexibility of Process

Broad competitive two-step auction

First round based on more extensive confidential memorandum

Competitive two-step auctionBidding Format

General public disclosure through press release; announcement does not necessarily imply that a sale is the only option

Limited disclosure of existence of sales process; marketing materials circulated

Level of Disclosure

Typically fifteen or greaterGreater than five, typically five to fifteen

Number of Potential Buyers Contacted

Contact wide range of potential buyers

Contact wider range of logical buyers

Description of Process

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Challenges for a Public Sale Process in India

Information Sharing– Limitations in sharing information with the potential buyers in light of the insider trading laws– Buyers may want to conduct extensive diligence and ask for access to non-public information

Information leakage– Financial press, brokers could spread rumors which could lead to volatility in the stock price of the target

thereby making the process very difficult to manage

Prone to litigation– Involvement of a large number of public shareholders increases the probability of law-suits, petitions against the

selling shareholders, buyers thereby making the process cumbersome and costly

Employee Morale– Employees and existing management may view the process with skepticism, and could lead to unwarranted

attrition, reduced enthusiasm levels

Running a sale process involving a public company is a complex ask as it involves multiple stakeholders in a complex regulatory environment

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