'Growth for some companies has been hard to come by and this is a smart way to get there.'
Companies are increasingly turning to mutual funds to help finance their acquisitions even as banks face restrictions on providing debt-financing for such deals.
Mutual funds helped provide debt-financing to deals such as Mankind Pharma's acquisition of Bharat Serums and Vaccines, Nirma's acquisition of Glenmark Life Sciences, and Tata Consumer's acquisitions of Capital Foods and Organic India, according to market participants.
Banks have limitations on financing such deals in India due to Reserve Bank of India rules.
Fund managers expect more issuances to hit the market as companies turn to other pools of debt capital.
Consumer firm acquisitions and deals emanating from corporate insolvency are expected to drive the trend in the future.
The debt-equity mix for funding the acquisition is decided by individual managements on a case-by-case basis, depending on their firm's needs and existing capital structure, but firms planning acquisitions have tapped capital market participants, including MF debt schemes as sources of funding, said Debraj Lahiri, fund manager at Bandhan Mutual Fund.
Foreign currency borrowings offer lower rates but come with hedging costs, unless the acquisition is of an overseas asset and foreign currency cash flow is expected, according to Lahiri.
Mahendra Kumar Jajoo, chief investment officer of fixed income at Mirae Asset Investment Managers (India), said a few companies have raised large amounts through the bond market for deployment towards mergers and acquisitions (M&As), and the numbers are expected to increase further in coming quarters.
Mankind Pharma raised over Rs 5,000 crore (Rs 50 billion) through the issue of debt paper to help pay for its acquisition of Bharat Serums and Vaccines with offerings in women's health, including fertility drugs and post-pregnancy treatments, in addition to making antiserum to treat snakebites and medicines for rabies.
Ahmedabad-headquartered conglomerate Nirma group raised Rs 3,500 crore (Rs 35 billion) through the issue of bonds to help fund the acquisition of Glenmark Life Sciences, which was completed in March 2024 and allowed the conglomerate to strengthen its presence in the pharmaceutical space with Glenmark being a manufacturer of active pharmaceutical ingredients (APIs).
Similarly, Tata Consumer raised around Rs 3,500 crore (Rs 35 billion) through commercial paper to help fund the acquisitions of Capital Foods, which makes products including Ching's Secret, and Organic India, which makes herbal supplements and tea.
This comes even as M&As have been on the rise in the Indian market after the pandemic. There were around 1,822 deals on average in a year in the five years leading up to 2019.
The yearly average is up 54 per cent to 2,806 deals per annum in the five years since 2019.
Midcap firms are also active on M&As, according to Sumat Chopra, partner at management consultancy firm Kearney and head of their private equity and mergers and acquisitions practice for India.
"They are quite acquisitive end-to-end. Growth for some companies has been hard to come by and this is a smart way to get there," he said.
Frequent M&A buyers are able to show 3 to 6 per cent higher growth in revenue and Ebitda (earnings before interest, taxes, depreciation and amortisation) than companies that are doing deals for the first time, according to a Kearney study.
Feature Presentation: Rajesh Alva/Rediff.com
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