Deals stuck in time-out

NEW DELHI/MUMBAI: Call it the collateral damage of a strawberry string. As a general sense of euphoria embraces the entire economy, promoters of unlisted companies are getting increasingly demanding while negotiating private equity (PE) deals.

The predictable offshoot: PE deals in India Inc are getting to be a time-consuming process than ever before. So if MTR Foods, Barista and ACME Telepower deals are still stuck in convoluted negotiations, it doesn’t surprise many.

These companies had given out mandates well over 7-8 months back, say sources. So did Writers Corporation and Raj Tour & Travels. Similarly, south-based durables retailer, Viveks, has been talking to PE firms for more than a year now. On the other hand, Kanpur-based detergent maker Ghari Group is reported to be on the verge of signing on CVCI, a good six month after it began the process. All this for a small fraction of equity in each company.

“The expectations are going haywire,” says Puneet Bhatia, MD, Newbridge Capital. “As strong quarter numbers come in, expectations go up again and the promoters are hesitant to commit.” This has created a situation where both sellers and buyers spend months on negotiations and due diligence.

According to analysts, with hordes of PE firms vying to pick up equity in each company, it has clearly become a seller’s market. And sellers have high expectations which may not go down well with the strategic investors. “Deals are taking longer because a lot of smaller companies want a multiple that PE players are not ready to give now as the public market for smaller companies is drying up, but very often the sellers are not aligned to the changed market realities,” says Vibhor Mehra, VP, SAIF Partners.

A few PE deals completed in the early part of the year reflected higher multiples due to the bull run. In that situation, companies played one investor against another and continue doing that even today, but now the PE players have hardened the stance, and aren’t ready to pay that kind of premia. So in a way easy money is vanishing.

Most companies offloading equity are typically entrepreneurial firms. Their models are scaleable, so to that extent, some premium is justified, but with so many bidders jostling for the deal, promoters see a higher perceived valuation than many would be willing to pay. Adds Hemendra Mathur, director, Yes Bank, who heads it’s agri-business fund management, “Each PE firm that is looking to buy into a company has a different valuation methodology, as the result price bid from each PE firm tends to vary sharply. This leaves the seller unsure hoping the next bidder would have a better price offer.”

In some cases, the sellers are leaders in their space and very well entrenched, so they are not in a hurry to close the deal. “There is no desperation to cut a deal for some of these companies, so many of these deals are nice-to-do deals and not have-to-do deals. So the promoters are taking their own sweet time,” adds Bhatia.