Emami Ltd’s shareholders celebrated their company losing Paras Pharmaceuticals Ltd to Reckitt Benckiser Group Plc. Emami’s share price rose 17% on Monday, after losing about 27% in value since 1 November, as it became evident that Paras had become an expensive target. Reckitt will pay Rs3,260 crore to acquire the Rs401 crore turnover company which makes popular personalcare and healthcare brands.
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The deal is not cheap, with an enterprise value (EV) to sales of eight times its fiscal 2010 turnover. It is much higher than Dabur India Ltd’s EV/Sales of five times, but is closer to Godrej Consumer Products Ltd’s valuation of seven times. Reckitt would have its reasons for paying this price, apart from the need to outbid a number of contenders. One could be profitability. Paras’ operating margin in fiscal 2010 was about 27%, a little above Reckitt’s own margin of 24%, but much higher than the 20% levels of Godrej and Dabur. Another could be a control premium, which is usual in such acquisitions.
And, India also represents a strategic market for Reckitt. The company, similar to other global consumer companies, has been focusing on developing markets for growth. In the nine months ended September, revenue in developing markets rose by 19%, compared with 3% for North America and a decline of 1% in Europe. Buying Paras may add only about 0.7% to its 2009 revenue of $7.7 billion (Rs34,881 crore today), but will add to about 4% to revenue from developing markets.
In terms of size, that is still insignificant, but Reckitt would have its sights set on taking a larger share of India’s fast-growing market for home and personal care products. It is already present in India with brands such as Dettol, Harpic, Mortein and Vanish to which it will now add Paras’ personal care and healthcare products.
Such acquisitions bring the usual benefits of filling portfolio gaps, synergies in supply chain and cost economies due to scale benefits.
But a key benefit for Reckitt, which would be a threat for other companies, is if it adopts and scales up Paras’ strategy. The company has been a nimble-footed and aggressive market player, entering categories where iconic but ageing brands held sway, and then using a combination of smart product development, packaging, distribution, and advertising to grab market share. Some of its products such as Moov, Dermicool and D’Cold are examples of that. It has also done well by creating new product categories.
If Reckitt adopts its strategy and not just the products, it could become a more aggressive player in India. It has a large portfolio of products globally, many of which could find a market in India. The market, too, appears ready to experiment. That could be a real threat for Indian firms, as it would mean another tough competitor, in what is now becoming a crowded market. Reckitt would also take Paras products to other developing markets it operates in. In the next six months to a year, it will become clear whether Reckitt changes its operating style in India, or just bolts on Paras’ brands to its existing business.
Coming to Emami, shareholder relief that their company did see such a large cash outflow is understandable. But Emami appears set on buying growth and it has shareholder permission to raise funds for doing so. It may have to settle for smaller companies or brands, which may come as a relief as it will involve smaller payouts. But valuations will not be cheap, as the Paras buyout will set a new benchmark for forthcoming mergers and acquisitions.
Graphic by Yogesh Kumar/Mint
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