Marico Ltd has made an aggressive move to grow its domestic personal care business, by acquiring Paras’ personal care brands from Reckitt Benckiser Group Plc. It is likely to have paid a handsome—but undisclosed price—to acquire these brands, but has its sights set on the long run and its own ability to extract cost synergies.
Reckitt Benckiser had paid about 8.2 times sales to acquire the healthcare and personal care business of Paras. The personal care business’s sales is estimated at Rs 150 crore in 2011-12. Assuming the same valuation as Reckitt paid for Paras, the personal care business would have been valued at Rs 1,200 crore. But it is likely to have fetched a lower valuation, since Reckitt was more keen on the healthcare business, which was larger and probably more profitable as well. Even if we assume a valuation in the range of 50%-75%, it works out to Rs 600-Rs 900 crore, which is sizeable even at the lower end of the range.
One concern investors will have is the funding of the transaction. Marico had gross debt of Rs 798 crore as of 31 December, cash of Rs 396 crore, and a debt to equity ratio of 0.7:1. The initial funding will be through internal accruals and debt, and the company has indicated an equity component too.
The initial impact of this acquisition on Marico’s business may not seem dramatic. In the December quarter, Marico’s domestic consumer products business had a turnover of Rs 716 crore, to which the Paras personal care business will add about 5%. But Marico is not looking at a short term boost to sales.
This acquisition marks a more aggressive positioning in the personal care segment in India, with brands such as Livon, Set Wet and Zatak.
In overseas markets, Marico is already present in the post-wash hair care and male grooming segment, though deodorants will be a new category. The Paras acquisition gives it access to a fast growing personal care portfolio.
Also, these products suffer less from commodity price fluctuations, compared to hair oils or refined edible oils. Paras has done a good job of incubating these brands, with unique marketing campaigns.
Still, these are relatively small brands, which is evident from the overall revenue size. Also, competition in these segments is significant and increasing. Marico has the tough task of growing them into sizeable national brands.
In the long run, personal care business can counter the commodity-driven nature of its current portfolio. In the short term, the acquisition may strain its balance sheet and also require further investments. Investors may be less enthusiastic about the prospects of an equity dilution. That may explain why its share lost its initial gains, closing on Friday at Rs 160, down by 7% from Thursday’s highs.
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