On PE St, Warburg’s deal with Future no tide-turn

This story first appeared in DNA Money edition on Wednesday, June 6, 2012.

The deal between Warburg Pincus and Future Capital Holdings is more an exception than sign of an emerging trend on Private Equity Street, say experts.

To be sure, equities have lost a fifth of their value over the past year and valuations look much better.

“But valuation expectations have not softened yet and that is only making things more difficult. It’s a great time to invest, but one also needs to take into consideration that PE firms are fighting their own battle justifying their existence and the current state of economy is not really helping,” said Pankaj Karna, managing director, Maple Capital Advisors.

Gaurav Deepak, managing director, Avendus Capital, also sees the increasing economic uncertainties slowing down growth-oriented private equity deals in infrastructure related sectors. “At the same time, we believe that consumer, healthcare and other non-cyclical sectors will continue to see robust deal closures,” he said.

According to PE investments data compiled by Grant Thornton, in April this year, mergers and acquisitions and PE deals totalled $2.6 billion (99 deals), way below the $8.2 billion (101 deals) logged in April 2011 and $3.1 billion (136 deals) seen in April 2010.

PE deals cut much smaller portions at $0.6 billion (38 deals) in April 2012 compared with $0.8 billion (37 deals) and 0.8 billion (35 deals) in the corresponding period of 2011 and 2010, respectively.

One may continue to see evidence that a sombre global outlook, slowdown in Indian GDP growth, high inflation and elevated deficits has “significantly impacted investor confidence and private equity firms are reassessing/ refocusing on the way they do business,” auditing and consulting firm Deloitte said in a recent report titled ‘PE fueling India’s growth’.

Over a longer term, however, PE deals are seen materialising.

Kalpana Jain, senior director, Deloitte Touche Tohmatsu India said that while there is caution in the market, PE firms have shown great appetite for directing monies into companies that would benefit from the strength of domestic consumption in India and the potential beneficiaries of such an approach by the PE firms will be segments like small retail format stores, hospitality and food and beverage.

“Given that money is needed at core infrastructure, the investing community is of the opinion that although it may take time, investment in backbone sectors such as infrastructure, education, healthcare and renewables will continue to see more traction as government policies streamline investment and exit modalities,” said Jain.

According to sources, what also helped in the case of Future Capital was that it was in the market for almost a year.
In fact, promoter Kishore Biyani had almost negotiated a deal with the Deccan Chronicle Group.

“It was almost concluded but got delayed as Deccan was awaiting funds required to make the acquisition,” said a source.
A number of private equity players, including Baring Private Equity, Bain Capital, CX Partners and L&T Finance were also pursuing the acquisition till about three weeks ago.

“While it was certain that Deccan will acquire Future Capital, other suitors continued to pursue the deal simultaneously. However, when Deccan informed they didn’t have enough funds to conclude the deal, that’s when Warburg Pincus stepped in. Surprisingly, it took them just two weeks to negotiate and close the deal,” said the source.

On Monday, Future Group said it will sell a 40% stake in the non-banking finance company to US-based Warburg Pincus for Rs 425 crore. Warburg’s stake in the entity will rise to 53.67% post an open offer, taking its total deal size to Rs 550-560 crore. Additionally, Warburg will invest Rs 100 crore in Future Capital.

Cable Digitisaton: Chaos is fine, extension of deadline is not

The Cable and Satellite (C&S) fraternity has been working aggressively to meet the government's June 30, 2012 deadline for Phase-1 cable digitisation and compulsory use of set-top boxes (STBs) in the four metros, which is just a three weeks away.

Despite a short timeline for digitisation, the fraternity stressed that it should be met with without fail. While majority of the players foresee a chaos situation in the market place, the consensus is that chaos is still better as cable subscribers will then make time for digitisation.

Recollecting a similar situation that broke out earlier over the 'know your customer' (KYC) deadline for mobile connections, Nagpal said, "The mobile subscribers took it seriously only after their connections were taken off the network. We saw long queues in the following days and weeks for getting the KYC procedure done.

"It is very likely to happen in case of digital cable as well. Customers who do not act before the July 1 deadline should be willing to wait for 5-10 days or more without TV, whatever it takes us to get it to them. That's because if you give them an additional 6 months, you will fall back into a limbo."

Ravi Mansukhani, MD, Incable, Indusind Media & Communications Ltd while pointing to other issues viz. terms of business, selling price of boxes to consumers, price for retailing the channels, overall business plan etc, stressed on the fact that the deadline should be met.

"Who is the biggest loser, if digital addressable system (DAS) does not happen? Who is spending all the money in this entire exercise? We have all ordered 2 million boxes, spent the maximum amount of money. We are sitting on inventory.

"We want to implement DAS effectively and successfully. Now whether the government wants to phase it further or stick to the phase, let them come up with the solution. But that is the bottom line," asserted Mansukhani.

Digitisation will help plug tax losses

The story first appeared in DNA Money edition on Tuesday, June 5, 2012.

Digitisation in the Indian cable and satellite (C&S) sector is set to significantly plug tax losses caused by under-declaration of subscriber numbers by some last-mile cable operators, say industry experts.

According to data presented by Jawahar Goel, former president of Indian Broadcasting Federation (IBF), to the Telecom Disputes Settlement & Appellate Tribunal (TDSAT) in 2008, a meagre 6.8% service tax was being declared by cable operators across cities such as Delhi, Kolkata, Bangalore, Chennai, Hyderabad, Jaipur, Ludhiana and Gurgaon.

The data also showed that Delhi, Kolkata, Bangalore, Chennai and Hyderabad were among the cities that reported highest leakage.

Goel said he is in the process of collecting similar data for the last four years, which will throw light on latest scenario.

Low tax compliance, according to industry sources, is because a certain section of cable operators uses various means to influence the tax implementation authorities and gets away with it.

“The not so influential cable operators, however, bear the brunt as they are being made a scapegoat by the tax authorities to meet their targeted revenues. The authorities also go to the extent of arresting such honest cable operators because they refuse to pay up,” said the source requesting anonymity.

The C&S players also feel that the government’s taxation policies need to be rationalised. The fraternity says that a lot was promised like fiscal incentives, some compensation in terms of taxations, etc, but nothing has really happened.

Harit Nagpal, MD & CEO, Tata Sky and president of DTH Association, said, “We are okay with tax. But over-taxation or multiple-taxation is certainly a problem. The state takes the entertainment tax. The Centre charges the service tax. There is duty on imported set-top boxes. And this is in addition to the licence fee.”

“The DTH and cable operators have become the collector of tax from its subscriber base,” said Dish TV’s Goel, adding, “while there’s multiple taxation for DTH and cable operators, the multiplex industry with a similar business doesn’t pay any service tax.”

Besides multiple taxation, the industry feels charging entertainment and service taxes onfree-to-air (FTA) channels is not appropriate.

Anil Kumar Malhotra, COO - sales & operations, Wire & Wireless India Ltd, said, “In Maharashtra, entertainment tax on cable connection is Rs45 (per subscriber). Add service tax to that and the subscriber is paying approximately Rs160 i.e. around 60% over and above by way of taxation for FTA channels...something that is of essential value to the consumer.”

Echoing the sentiment, Anil Khera, CEO, Videocon Digital DTH Service, said, “There will be a lot of confusion on how much you really collect from a customer.”

Cable industry fears chaos as digital deadline nears

This story originally appeared in DNA Money edition on Thursday, May 17, 2012.

The government-set June 30, 2012 deadline for Phase-1 cable digitisation and compulsory use of set-top boxes (STBs) in the four metros might get extended. Independent cable operators have approached the ministry of information and broadcasting (I&B) to sort out contentious issues before making the switch from analogue to digital.

The government notification on the deadline for digital addressable system (DAS) was issued on on November 11, 2011. But, Roop Sharma, president of the Cable Operators Federation of India (Cofi), said that government delay in decision-making meant that the final guidelines came only on April 30, 2012.

This left the cable fraternity with a very short execution window, said Sharma. “As per rules, the cable fraternity should get at least six months to prepare themselves to meet the deadline. But this won’t be possible now. It is a very genuine problem faced by cable operators. Hence, an extension is inevitable.”

Jagjit Singh Kohli, MD and CEO of Digicable Network, agreed. “I think an extension will be necessary. If not six months, the industry should at least get another three months to implement Phase-1 digitisation.”

On May 10, the Mumbai High Court, acting on a petition fined by 15 cable operators, directed the national government to defer the deadline.

Anil Malhotra, COO of Wire and Wireless India Ltd (WWIL), a multi-system operator or MSO, said, “While MSOs are more than eager to implement digitisation, the final decision still rests with the subscribers. The deadline is nearing by the day. A last-minute decision to opt for a digital cable connection will very likely lead to a blackout kind of a scenario sooner or later,” said Malhotra.

Harit Nagpal, MD and CEO of Tata Sky, feared chaos of the kind that broke out earlier over the know your customer (KYC) deadline for mobile connections. “The subscribers took it seriously only after their connections were taken off the network and we saw long queues in the following days and weeks for getting the KYC procedure done. It is very likely to happen in case of digital cable as well.”

As suspense over deadline extension intensifies, large MSOs are busy putting together a business model for the digital cable era with focus on commercial arrangements with broadcasters.

In fact, operators and broadcasters held an informal meeting May 14 to discuss the matter, said a highly placed source. “Any concrete direction on the future course of action will be arrived at only after the commercial arrangements are agreed upon. Till then, it’s a wait-and-watch situation,” said the source.

Industry sources said that coming weeks will see a series of meetings involving local cable operators (LCOs), MSOs, direct-to-home (DTH) operators, broadcasters and investors. Several issues will be discussed threadbare.

Cofi’s Sharma alleged that the Telecom Regulatory Authority of India (Trai), the industry regulator, had ignored cable operators’ views while framing the guidelines, particularly those relating to the revenue sharing ratios between LCOs and MSOs which will affect LCOs’ livelihood.

Quality and interoperability of STBs to be provided by MSOs is another issue causing concern to LCOs, said Sharma. Digitisation, including taxes and other levies, will make home television entertainment more expensive, particularly for households with multiple televisions, said Sharma.

Trai data show 94 million cable customers in India in 2011, out of 147 million TV households.Some 44.4 million homes have DTH TV. With MSO digital penetration currently at 5 million, some 90 million STBs will have to be deployed country-wide, to meet the 2014 deadline for pan-India digitisation.

With Decision, Piramal widens pharma play

My colleague Priyanka Golikeri co-authored this story appearing in DNA Money edition on Thursday, May 17, 2012.

By acquiring Decision Resources Group (DRG), a US-based healthcare information provider, for Rs3,400 crore ($635 million), Piramal Healthcare is venturing into a field where no major Indian pharma player has tread so far.

Analysts said the move to acquire a firm that provides research, consulting and analytics services, instead of a pure-play pharma player, is a big step forward into the larger healthcare spectrum.

Piramal stands to benefit from the increasing demand for drug market information as research costs are rising and approval rates for new medicines are low.

Ajay Piramal, chairman, Piramal Healthcare, said, “The need for specialist information is critical and the demand is growing. DRG’s portfolio of products is widely regarded as the gold standard of information. We will leverage our longstanding reputation and relationships with global pharma companies, our knowledge of emerging markets as well as our track record of successful acquisitions as we continue to grow further DRG’s leadership position in the healthcare information and analytics industry.”

“DRG boasts of a strong team of 290 analysts and network of 125,000 healthcare professionals. What is really impressive is the fact that 48 of the top 50 global pharmaceutical companies form part of its clientele and these aspects are worth more than value that any drugmaker could have fetched Piramal,” said an analyst from a leading brokerage.

Piramal, which sold its domestic formulations business to Abbott Labs for $3.8 billion and diagnostics business to SRL for Rs600 crore, has been scouting for investment opportunities to deploy its cash pile. DRG, one of the fastest growing firms in the $5.7 billion healthcare information firms at a 20% CAGR, provides high quality, web-enabled research, predictive analytics via proprietary databases and consulting services to the global healthcare industry.

The company’s projected revenues for the year 2012 is $160 million.

A market leader, DRG is positioned with Reed Elsevier, Gartner, Forrester Research, and acquiring such a company puts Piramal also in the same league, analysts said.

“Given DRG’s client base, the acquisition certainly works to Piramal’s advantage as they can now have an entire database at their disposal,” said Ranjit Kapadia, senior vice-president, Centrum Broking.

DRG’s business is spread across biopharma and medical technology, which automatically increases Piramal’s bandwidth, say experts. “There is an element of differentiation which acquisition of a firm like DRG brings,” said Adithya Bhat, managing director, Protiviti Consulting, adding that it is a broader channel in the healthcare industry and a smart move by Indian firm.

The acquisition, Piramal said, will be completed this quarter and funded through a mix of debt and equity in ratio of 1:1. The debt would be raised against DRG’s assets in Burlington, Massachusetts.

Piramal’s has acquired a 100% stake from private equity firm Providence Equity Partners, which had bought the company in 2007. “PE firms generally have a specific horizon for their investments in different companies and Providence was looking for an exit. I really cannot share details about the multiples being paid to acquire the controlling stake,” Piramal said when asked about DRG’s profitability and other valuation-related details.

Westinghouse aims to garner 5-10% of consumer durables

R Venkat, CEO & Director, WAIP

This Q&A first appeared in DNA Money edition on Wednesday, May 16, 2012.

US-based consumer durable firm Westinghouse Electric Corporation forayed into the Indian home appliances market sometime in November 2011. The management has set itself an ambitious target of Rs200 crore in sales by 2014-15. R Venkat, CEO & Director, Westinghouse Appliances India Pvt, speaks about the company’s road map for the Indian market. Edited excerpts:

Could you briefly tell us about the company and its offerings?
The brand, Westinghouse, was established in the US some time in 1886 and has gone through various stages of ownership changes. A part of Westinghouse Electric Co, it underwent major restructuring exercises in 2010-11 wherein CBS is now the licensee for brand Westinghouse. The operations in India come under the Dubai-headquartered Mapana Middle East FZ Co and there is another company W- Lifestyle which is a global licensee for the brand operating out of Hong Kong.

We launched operations in India in November 2011 and are currently selling our products primarily in the northern region i.e. Delhi, Haryana, Punjab and Jammu & Kashmir. Targeting the fast-growing Indian retail home appliance market, our range comprises small domestic appliances, personal care, garment care, heaters, baby care and premium fans, to start with.

Despite being a heritage brand, you’ve taken really long to enter the Indian market.
The Westinghouse restructuring exercise only got over early last year and the management took some time to identify the right product mix to make the right impact here in India. The Indian market is the second-largest in the world which is growing by leaps and bounds and we felt the time was right as purchasing power, buying behaviour and lifestyles were all changing.

But you already have competition from Korean and Japanese brands that have captured a significant slice of the market?
We are a young company and certainly can learn quickly from our competitor’s mistakes and that’s how we intend to operate in the Indian market. We are carefully studying the market demographics and putting together a multi-pronged strategy. We will focus on innovating and offer products that will give customers a better choice than what is already available.

Are your products available across the country? Which existing brands would you be competing with directly?
Not as yet. We are doing a phase-wise expansion, starting with North India followed by South, West and East. The focus will largely be in tier I and II cities. We are currently selling through 200 stores in Delhi, NCR and J&K. By August this year, we will be present in all the 42 cities that are potential markets for our product range across the country. Competition will be from brands like Panasonic, Philips and Indian companies like Havells, Usha Lexus and Bajaj Appliances.

Which are the other product categories you are planning to add to your offerings?
High-end and decorative ceiling fans are a category we have very recently introduced in the market. These are dual-technology, summer-winter fans that can run clock-wise and anti-clockwise and come with light attachments. We currently have 8 models, but will bring in the entire range of 36 models gradually. These fans are priced anywhere between Rs7,000 to Rs30,000 and are a niche product. Then, we have the lights category with a range of CFL and LED lights followed by air-conditioners. While lighting products will happen in the next six months, a decision on air-conditioning products will be taken how the market situation this year will be.

But the industry seems to be fairly bullish on the AC product category, especially when temperatures are soaring across the country.
Well, last year wasn’t very good for the AC market which witnessed a negative growth of 20%. My understanding is that every major brand in the AC category is having a tough time and an increase in raw material costs by 20-25% has only added to the trouble.

What are your revenue targets for India? How would you increase brand visibility?
Once presence is established in all the 42 cities across the country for our over 100-odd stock keeping units (SKUs), we will start working on the visibility side. The plan is to invest to the tune of Rs70 crore on marketing and product development in the next three years. We want to acquire a significant share of the estimated Rs6,000-crore home appliances market and are targeting Rs200 crore topline by 2014-15. The idea is to get at least 5-10% market share of the organised brand segment in India.

Where are you sourcing all products from?
Most companies follow the original equipment manufacturer (OEM) approach which is what we are doing to ensure a leaner organisation. We are working with third-party manufacturers in China and some from Indonesia. Lights will come from the Middle East. Some of the products like heaters and irons that require Bureau of Indian Standards compliance will have to be manufactured locally. So, wherever we feel there is a cost benefit in terms of sourcing, we will get the products made from there.

What is your distribution strategy in India?
We will be using a combination of traditional and contemporary approaches. Carrying and forwarding (C&F) agents will be out primary strategy followed by online with the likes of fipkart.com and selling through modern retail chains. Some of our products are also targeted at the institutional market so we will use that distribution channel as well.

Panasonic Corp set to acquire 72% in Firepro Systems

Global electronic products leader Panasonic Corporation is bailing out the Indian fire solutions company Firepro Systems from a financial crisis situation. The Japanese company will acquire 76.2% of Firepro’s shares for an undisclosed sum. The acquisition of majority stake will be done through a combination of primary and secondary transactions and the deal is likely to be concluded by late May, 2012.

Panasonic management said in an official statement that it has entered into an agreement (with Firepro) of subscriptions of allocation of new shares to a third party with its consolidated subsidiary, Anchor Electricals. “Panasonic will acquire a portion of Firepro's ordinary shares previously owned by investment companies... Following the acquisition, Firepro's management will continue to own 10.8%, and investment companies 13.0% of the company's shares. Through a third party allocation of shares, Anchor will increase its capital,” company management said in an official note.

When contacted, Panasonic Corp’s media agency said the company management will not be sharing any additional information apart from what was mentioned in the official note.

However, going by the overall health of the company (Firepro), it appears to be a distress sale and that Panasonic would have picked up the majority stake at a very significant discount to the valuations given by its existing private equity (PE) investors.

Among existing private equity investments in Firepro include AIG’s Rs 50 crore and StanChart PE’s Rs 150 crore placements in 2006 and 2009 respectively. As per reports, AIG and StanChart PE have picked up approximately 15% and 26% stake in Firepro respectively.

While AIG could not be reached, Nainesh Jaisingh, India Head of Standard Chartered Private Equity Ltd (SCPEL) did not revert to calls and text on his cell.

Earlier reports had also indicated that UTC Fire & Security, a $6.5 billion arm of United Technologies (a $54 billion diversified aerospace and building systems provider), was looking to buy FirePro for $200 million. The deal however, did not go through as the prospective buyer was not very comfortable with Firepro’s prevalent financial health.

Firepro Systems, with a topline of Rs 700 crore, is a privately held Indian company offering security and building management systems and, integrated solutions for fire protection. In 2011, the company’s business suffered a major setback owing to the economic slowdown which significantly impacted infrastructure and real estate sectors in the country. An ICRA report in September 2011 said that the Firepro was struggling with its debt position, facing stretched liquidity and delays in servicing interest obligations.

Panasonic Corporation however, sees the acquisition as a way forward in building the foundation by expanding comprehensive solutions business in India. “The move is a very major part of the company strategy in order to set the stage for  strengthening Anchor's non-housing business and making it the number one general electric facilities materials manufacturer in India; also accelerating the introduction of Panasonic products into India, and expanding its comprehensive solutions business in India non-housing fields,” said Panasonic in the official note.