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Rupee Rally Means Highest M&A Premiums in BRICs: India Credit

Rupee Rally Means Highest M&A Premiums in BRICs
The rupee’s 17 percent rally in the past 20 months and falling dollar borrowing costs are making it possible for India’s billionaires to pay higher premiums for acquisitions than companies in Brazil, Russia and China. Photographer: Adeel Halim/Bloomberg

The rupee’s 17 percent rally in the past 20 months and falling dollar borrowing costs are making it possible for India’s billionaires to pay higher premiums for acquisitions than companies in Brazil, Russia and China.

Indian companies paid an average 28 percent premium above the share prices of their targets, the most among the BRIC nations, according to data compiled by Bloomberg. The rupee’s 5 percent appreciation this year against the dollar shaved about $2 billion off the cost of acquiring fuel, steel and mobile-phone businesses in local-currency terms.

“Stronger emerging-market currencies mean that when the time comes to repay those dollar bonds, Indian companies will be in a good position to benefit,” said Ramana Kumar, who manages $1.1 billion of bond investments in Riyadh at Banque Saudi Fransi, which is partly owned by Credit Agricole SA. If credit remains available Indian buyers “will almost certainly” participate in more mergers and acquisitions next year he said.

Sunil Mittal’s Bharti Airtel Ltd. and Mukesh Ambani’s Reliance Industries Ltd. led $39.6 billion of cross-border deals by Indian companies this year, the most since Bloomberg started compiling the data in 1998 and up from $2.8 billion in 2009. Dollar-denominated bond sales from India more than tripled this year to $6.5 billion, Bloomberg data show. Indian corporate debt returned 87 percent in the past two years, a JPMorgan Chase & Co. index shows.

Hoarding Cash

Acquisitions last year slumped from $19 billion in 2008, after Lehman Brothers Holdings Inc. went bankrupt, freezing the global credit markets. Companies spent 2009 “building up cash balances” before reviving plans they had put on hold, Kumar said in an interview yesterday.

Elsewhere in India’s credit market, the nation’s central bank raised interest rates yesterday in a bid to contain inflation, sparking a rally in the rupee and government bonds. The Reserve Bank of India boosted the repurchase rate to 6.25 percent from 6 percent, its sixth increase this year.

The rupee gained for a second day, rising 0.1 percent to 44.34 per dollar. The currency will strengthen 1.9 percent by the end of 2011, with the dollar falling to 43.50 rupees, according to the median forecast in a Bloomberg survey of 16 analysts.

Inflation slowed to 8.62 percent in September from 11 percent in April. RBI Governor Duvvuri Subbarao said in a statement the likelihood of further policy tightening in the “immediate future is relatively low,” signaling no increase in the next three months.

Yields Fall

India’s 10-year note yield fell for a third day, sliding three basis points to 7.943 percent, the least since Oct. 6. The securities yield 539 basis points more than similar-maturity U.S. Treasuries. The spread is down from 567 on Oct. 20, the widest since January 2001. Comparable securities pay 12.20 percent in Brazil, 7.32 percent in Russia and 3.60 percent in China, Bloomberg data show.

“The policy is positive for bonds as the RBI hints at staying put on rates in the near future,” Deepali Bhargava, a strategist at ING Groep NV in Mumbai, wrote in a research note yesterday.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, dropped. The rate, a fixed payment made to receive floating rates, fell 1.5 basis points to 6.59 percent, following a 12.5 percent plunge yesterday.

Indian dollar-denominated corporate debt yielded an average of 4.75 percent on Nov. 2, down from 6.595 percent at the end of last year, the JPMorgan index show. The spread over Treasuries narrowed to 380 basis points from 409 on Dec. 31 and 1,307 two years ago. ICICI Bank Ltd.’s 7.25 percent dollar-denominated perpetual bond returned 16.5 percent this year, while Tata Power Co.’s 8.5 percent note due August 2017 gained 9.5 percent.

Default Swaps

The cost to protect against a default by State Bank of India, a state-owned lender that is the nearest measure for sovereign debt, fell 12 basis points to 164 basis points on Nov. 2 from a one-year high reached on May 25, according to New York- based data provider CMA’s credit-default swaps prices.

The contracts typically falls as investor confidence improves and rises as it deteriorates. The swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point, 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.

Funds based abroad have increased holdings of rupee corporate and government bonds by $8.7 billion this year to $16.2 billion as of Oct. 29, according to the Securities and Exchange Board of India. The government increased the cap on their debt holdings on Sept. 23 by 50 percent to $30 billion.

Acquisition Premium

The premium paid by Indian bidders for acquisitions, the highest since 2003, exceeds the 21 percent paid by companies in Brazil, 19 percent in Russia and 1 percent in China, according to Bloomberg data.

“These acquisitions are mostly strategic in nature and the premium is justified,” Ashvin Parekh, the head of financial services practice in Mumbai at Ernst & Young LLP, said in a phone interview on Oct. 28. “A stronger rupee has contributed to their buying power.”

Corporate bonds denominated in rupees have also gained, with the extra yield investors demand to hold India’s top-rated company debt over government securities falling to 70 basis points from 86 basis points, or 0.86 percentage point, at the start of the year.

Bharti, India’s largest mobile-phone company, paid $10.7 billion in June for the rival business of Zain Africa BV, in the biggest overseas foray this year.

Reliance, Essar

Reliance Industries, India’s biggest company by market value, was the most aggressive, with six deals in the U.S. totaling $946 million. Essar Group, controlled by the Ruia brothers, and Adani Enterprises Ltd., billionaire Gautam Adani’s energy company, are spending almost $1 billion to add U.S. coal-mining assets to their books.

A stock market rally this year has boosted the value of Mumbai-based companies managed by some of Asia’s richest businessmen. Adani stock advanced 72 percent, making it cheaper to issue shares to part-fund acquisitions, said Stefan Hagman, a fund manager in Stockholm at Svenska Handelsbanken AB, Sweden’s second-largest lender.

“There are great opportunities to expand,” Hagman said in an e-mail on Oct. 29. “M&A is a cheaper and better way to enter overseas markets.” He manages a 286 million-euro ($397 million) India country fund, which handed investors a 23 percent return this year.

Citigroup Inc. and HSBC Holdings Plc are the biggest managers of foreign-currency bond sales this year, Bloomberg data show.

“When it comes to funding those transactions, there are still limitations,” said Parekh at Ernst & Young. “Indian banks have not been able to participate as much as we’d like to see, either due to regulation or size of the industry’s balance sheets. That’s a little unfortunate.”

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