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January 9, 2013 7:24 pm
Warburg Pincus, the private equity group, is selling a big slice of its 70 per cent stake in Indian tyremaker Alliance Tire, in a deal that has drawn intense interest from the buyout community.
The equity is likely to be well over $500m, making it one of the largest private equity transactions in a country where the public market provides stiff competition to private equity groups. Only Bain Capital’s investment in listed Genpact is larger.
Bidders include Advent International, Blackstone, KKR, and Singapore state investment agency Temasek. Bain Capital and Carlyle looked closely at the transaction but as the valuation rose, the two dropped out, according to bankers and private equity executives.
The auction is already past the first round and the sale process could be completed in a matter of weeks, these people add. Warburg Pincus is selling down primarily for technical reasons. It first invested in Alliance in 2007.
The lack of deal flow is only one reason for the enthusiastic reception from Warburg’s competitors. Alliance is a rare success story when it comes to both Indian manufacturing and Indian export prowess – and demonstrates how companies elsewhere can compete against China’s huge economies of scale.
“Alliance Tire is a global company with an Indian advantage,” said one private equity executive with knowledge of Mumbai-based Alliance.
Despite labour costs that are a fraction of China’s and a rupee that has depreciated by about 25 per cent against the Chinese yuan in recent months, manufacturing is a relatively small part of India’s gross national product and the weakness of its currency has had almost no impact on its export performance.
Alliance’s strategy is to focus not on the $150bn market for cars where it would be forced to compete head-on with Chinese makers but to focus instead on the specialised $12bn market for agricultural and construction tyres, a market that is too small to attract China’s state-owned enterprises.
“Where you have highly engineered niche products, Indian companies can really add value,” said Vishal Mahadevia, a Mumbai-based partner for Warburg Pincus.
Today, Alliance has revenues of about $500m, up from sales of $125m six years ago. Of that total, 90 per cent of its production is exports.
“Labour intensity is our key competitive advantage,” said Yogesh Kumar Mahansaria, the company’s chief executive. “That’s because we are all about bespoke manufacturing.”
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