Canada’s largest fund manager CPP Investments (CPPIB) recently shelved its plans to sell a 50% stake in its logistics joint venture with IndoSpace despite getting bids from marquee global investors such as Mubadala and Dutch pension fund manager APG. The decision was reportedly due to a mismatch between the fund manager’s expectations and the bids it got. According to sources, there was a 10-15% difference between the ask and bid price, though this could not be independently verified.
Asia Pacific-focused developer ESR and German investor Allianz, which were looking to sell stakes in their warehousing platform, also called off the deal after facing a similar mismatch, sources said.
These are not just two stray cases, said top investment bankers and PE funds. About 80-85% of private equity (PE) deals which originated this year have fallen through, they said. In comparison, during 2021-2022, out of the 100 deals that originated, 80 were closed.
M&A deals also seem to have taken a hit, with only around 30-40% of the proposed having seen closure this year.
Qatar’s Nebras Power was supposed to acquire up to a 49% stake in Aditya Birla Group’s renewable energy business for nearly $400 million (Rs 3,320 crore). But the deal has been put on hold due to a valuation mismatch, sources said.
In another instance, Adani Enterprises withdrew its plan last month to demerge its 43.94% stake in Adani Wilmar and end its JV with Singapore-based Wilmar International, which also has a 43.94% stake in the company. While the Adani Group had said it was opting out of the demerger scheme to focus on reducing its minimum public shareholding requirement to 75% from 87.9% now, sources said the real reason for cancelling the demerger was linked in part to a valuation mismatch of its FMCG business, which had been put on the block in 2023.
The Adani Group had reportedly spoken to a number of FMCG and PE players in a bid to offload its nearly 44% stake in the JV, but its plans came a cropper due to a mismatch in pricing and valuations mismatch between the buyers and the seller. The Adani Group was hoping to get a valuation of $4 billion for its stake, but prospective buyers were ready to offer far less, according to sources.
Executives in the investment banking and PE space said the surge in stock markets has led to promoters and investors asking for higher valuations.
“We as a PE take a 3-5 year view. Today, stock markets are high and sellers are basing their valuations on that. But markets will stabilise later,” said Vivek Singla, managing partner and chief investment officer – private equity at InCred Growth Partners Fund.
When they enter at 30x P/E multiples, on exit they may get 20x P/E multiples “, he said. “We apply discounts on current multiples and also growth is not as robust as promised,” Singla said.
Price-to-earnings (P/E) multiple, also known as earnings multiple, is a metric used to compare a company’s market value to its earnings.
If deals don’t happen, sellers will have to wait a little longer or borrow from other sources, Singla said, adding: “Public market route was available till 3-4 weeks. But that window is shrinking now.”
Raghwendra Pande, business head, conglomerates, infrastructure & real estate, investment banking, at ICICI Securities, said: “In the last four quarters ended Q1FY24, there has been a significant re-rating of EV/Ebitda and P/E multiples led by robust earnings growth and strong domestic inflows in public markets. Private valuations in certain sectors are trailing by 25% or more. Hence, it is difficult to conclude private equity deals.”
The managing director of another investment banking firm said many companies are running a dual process – one in private equity and other one for public markets. “Many have evaluated both and went for IPOs. Hopefully, stock markets will settle down and we will see closing of PE deals,” he said, adding that the mismatch is more profound in pharma and healthcare, BFSI, and so on.
Investors said even asset-level deals are crumbling.
“A lot of asset-level deals are also falling through due to valuation issues. They ask absurd numbers which we can’t accept,” said a Singapore-based PE fund manager. He said deals are falling through even after they get clearance from the investment committee (IC) for such investments. After the due diligence, PE funds take the investment proposals to the IC, which either approves or rejects them, post which deals go to the next stage of negotiations.
“If we get clearance from the IC in July and August, by the time they come to October, sales will fall and deals will hit a wall,” he said.
Naveen Malpani, partner and consumer industry leader at Grant Thornton Bharat, said both buyers/investors and sellers have become circumspect now.
“Sellers are not looking to exit as easily and buyers/investors are looking for greater market access or share, mainly into smaller towns and cities. Buyers are looking at business models which are scalable and profitable. So, there is greater scrutiny of businesses today, what capabilities they bring to the table, and the level of market access they will provide if acquired,” he pointed out.
“Quite often, financial performance does not keep pace with expectation. Yet prospective sellers may land up quoting a valuation that doesn’t quite square up during scrutiny or due diligence. This could lead to a break-up if the buyer and seller cannot find common ground on how to take the deal forward,” said Siddharth Bafna, partner & head (corporate finance), Lodha & Co.
From: financialexpress
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