August 2007
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PE buyouts arrive in India

Private equity major Blackstone’s acquisition of 50% stake in Gokaldas Exports is significant in that it is the first major buyout of a listed company. With a takeover of Patni Computers likely soon, PE players operating in India have started doing what they do abroad, acquiring controlling stakes in listed companies. So far the great majority of PE investments in Indian companies have been more akin to portfolio investments. The change agent, however, is the willingness of at least some Indian promoters to sell out and not a sudden increase in risk appetite of PE players.

For PEs this makes sense. The value proposition, to use some jargon, that PEs bring to the table are primarily superior management skills. This includes perceived skills at cost cutting, improved supply-chain logistics and the ability to find clients using their global networks.

For Gokaldas Exports, India’s largest garment exporter, Blackstone’s global connections could help both at the front-end and the back-end. The PE acquirer would eventually exit, whether by selling in the markets or to a strategic investor, but it would have to deliver a long-term value proposition to make the exit profitable. Buyouts also have a beneficial spin-off for the economy in that they release risk capital for investments in newer areas. PEs would unlock value in established businesses while local capital moves to newer areas where it is perhaps better placed to manage the environment.

In the process, PE acquisitions would set in motion a value-creating capital rotation. Portfolio investments, such as Carlyle’s stake in HDFC or Temasek’s stake in Tata Teleservices, will however continue because the promoters of the best Indian companies are not looking to sell. But there will be plenty of mid-sized company owners who may be.

The logical progression of this nascent PE buyout trend is hostile takeovers. There are numerous Indian companies where a change in management could materially improve prospects. But in most such cases promoters are loath to sell out. A hostile PE takeover of such companies would help unlock value. While Indian promoters need to take note of the possibility, the regulators and financial institutions would do well to develop a more positive view of corporate raids, which has not been the case so far.
Source: Economic Times

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