Bank of America Sees Overseas Takeovers by India Companies Curbed by Rates

By George Smith Alexander and Ruth David - Jun 26, 2011

Overseas acquisitions by Indian companies may stay subdued in 2011 as the highest interest rates in more than two years deter chief executives from borrowing for expansion, Bank of America Corp. (BAC) said.

At the same time, inbound deals are likely to rise as foreign companies seize on low interest rates in Europe and the U.S. to buy assets in Asia’s second-fastest growing major economy, said Bala Swaminathan, vice chairman of corporate and investment banking at Bank of America’s Indian unit.

Foreign acquisitions of Indian companies are outpacing outbound transactions this year for the first time in at least a decade, after the central bank raised interest rates 10 times since the start of 2010, data compiled by Bloomberg show. The difference in yields between India’s AAA-rated corporate bonds and similar-maturity U.S. notes touched the highest in at least six years earlier this month, according to the data.

“Why would an Indian company want to borrow at a very high interest rate to buy into markets which are not growing?” Swaminathan said in a June 21 interview in Mumbai. “The way interest rates are poised, international companies can borrow at one or two percent and use that money to come and buy into India.”

While India’s economy grew about four times the pace of the U.S. in the quarter through March, the local benchmark stock index has slumped 11 percent this year, narrowing the valuation gap with the Standard & Poor’s 500 Index. That’s providing added incentive for foreign companies to attempt acquisitions in the nation of 1.2 billion people.
Valuations Fall

Companies on the Bombay Stock Exchange Sensitive Index trade at 14.8 times estimated full-year earnings, the lowest level in more than two years, data compiled by Bloomberg show. That compares with 13 times projected profit for the S&P 500.

The value of mergers involving Indian companies has slumped 32 percent this year to $25 billion, according to Bloomberg data. Inbound deals accounted for 62 percent of the total, up from 27 percent in the same period a year earlier, the data show.

Indian corporate owners’ limited ability to reduce their controlling stakes further may deter multibillion-dollar takeovers abroad, Swaminathan said. He predicted most deals could be in the $50 million to $500 million range.

“Expansionary capital, more than anything else, is sentiment-driven and right now the sentiment in corporate India is not very buoyant,” said Swaminathan, who joined Bank of America from Standard Chartered Plc in August last year.

“Discretionary expenditure on expansion is being deferred until such time as there is clarity.”

Reliance Industries Ltd. (RIL), controlled by billionaire Mukesh Ambani, sold stakes in 23 oil and gas areas in India to London- based BP Plc in February for $7.2 billion, the biggest inbound transaction in more than four years.

TPG Capital and Carlyle Group are among private equity companies in talks for buying a stake in Reliance Communications Ltd.’s mobile-phone towers unit, three people with knowledge of the matter said earlier this month. Reliance Communications is controlled by Anil Ambani, Mukesh Ambani’s brother.
Financing Support

Indian companies seeking acquisitions are increasingly asking banks to help finance the deals, according to Swaminathan.

“Wherever we are doing a transaction on the buy side, it’s reasonable to expect that if there is leverage in the transaction we will part of the leverage,” he said. Bank of America has “significantly” expanded its balance sheet in India since 2010, Swaminathan added without providing details.

The Charlotte, North Carolina-based lender is boosting staff in investment and corporate banking in India, the executive said, declining to give figures for hiring.

More Indian companies may sell divisions to free up cash for expansion, Swaminathan said. J.B. Chemicals & Pharmaceuticals Ltd., based in Mumbai, sold its over-the-counter cough and cold medicine brand in Russia, Doktor Mom, to a unit of Johnson & Johnson in May.

To contact the reporter on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net Ruth David in Mumbai at rdavid9@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net
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