By Shubi Arora

2010 was a robust year for Indian M&A and although total deal value subsequently declined in 2011 due to an uncertain domestic and global economic environment, India Inc. still managed to post some respectable figures.  According to a recent Grant Thornton report there were a total of 662 Indian M&A deals (including both cross border and domestic transactions) with a total combined value of approximately US$50 billion in 2010 as compared to 606 deals with a value of approximately $42 billion in 2011.  While the volume of both outbound and domestic M&A was down in 2011, a notable development was the increase in inbound transactions.  In 2010, there were 91 inbound deals with a total combined value of approximately $9.0 billion and in 2011 this number rose to 132 deals with a value of approximately $29 billion.  While various factors such as a weakening rupee made outbound deals more difficult to implement, Indian companies still regard foreign acquisitions as an integral part of their overall growth strategy.  Through 2012, companies that have access to cash and/or other sources of financing will undoubtedly continue to pursue strategic outbound transactions if valuations are favorable. 

While M&A activity remained strong in several sectors, energy deals indisputably contributed to the above-average deal numbers in 2011 and the year saw some significant transactions in this area, both inbound and outbound.  According to the Grant Thornton report, energy along with telecom accounted for over 50 percent of the 2011 deal value. 

Noteworthy among inbound deals was the Reliance-BP transaction, the single largest FDI in the history of India.  Under the terms of the deal, BP acquired a 30 percent stake in 23 oil and gas blocks held by Reliance, including the KG-D6 block in the Krishna-Godavari basin of the Bay of Bengal.  In addition, the two parties formed a 50/50 joint venture to source and market natural gas in India.  BP paid Reliance an aggregate consideration amount of approximately $7.2 billion for the interest in the 23 oil and gas blocks. The parties also agreed upon future performance payments of up to $1.8 billion if future exploration leads to commercial discoveries. BP’s deepwaterexpertise will prove to be critical as Reliance seeks to realize the area’s full potential. Already the parties have sought the approval of the Petroleum Ministry for $73 million in costs for preliminary E&P activities.  In addition to the Reliance-BP transaction, another significant inbound deal was the Vedanta-Cairn deal, the final phase of whichwas completed in 2011.  Through a series of transactions, Vedanta (including its subsidiary Sesa Goa Ltd.) acquired a 58.5 percent stake in Cairn India for the total consideration of approximately $8.5 billion and is now in the enviable position to control the development of Rajasthan’s oil-rich Bhagyam field.  Note that although Vedanta has already paid Cairn the money for the majority stake and has appointed its nominees to the board, the deal is still awaiting the government’s formal approval. 

In the outbound arena, GVK Power and Infrastructure Ltd. acquired a majority stake in the Hancock coal project in Australia for $1.6 billion in an effort to secure long-term coal supplies for its power projects.  Like GVK, GAIL (India) Ltd. too was active in the outbound space and in 2011 acquired a 20 percent interest in Carrizo Oil & Gas’ Eagle Ford shale assets in the United States for $95 million.  GAIL also plans to make additional investments in the US in the coming years.  While the GAIL deal value was significantly smaller compared to several other energy transactions that closed this year, GAIL’s foray into the shale business is important in that it is part of an important strategic plan to gain expertise that GAIL will be able to apply to the future development of shale assets within India. 

Needless to say, both inbound and outbound deals face tremendous challenges in an uncertain economic environment.  For instance, it seems that GVK already plans to sell a minority stake in its Australian unit, GVK Hancock, to raise funds to retire part of its debt and fund operations.  However, the magnitude and volume of Indian M&A deals in the energy space is illustrative of the fact that India is and will continue to be a contenderas it attempts to secure its energy future. However, both Indian and foreign companies must realize that, although there are opportunities in the market, one must not lose sight of the basics that make for a successful transaction – diligence, price discipline, and integration.  In a market that is still in turmoil, these factors become more critical than ever. 

Shubi Arora is Counsel in the Energy and Global Transactions Group of Akin Gump Strauss Hauer& Feld LLP and is based in Houston, Texas.  He can be reached at sarora@akingump.com. 

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