Aventis Pharma Ltd’s stock rose by about 6% on Wednesday, reacting to the acquisition of Universal Medicare Pvt. Ltd’s nutraceuticals business. The acquisition will add about 10% to the company’s turnover, which is significant, but not eye-popping.
Of greater significance is Sanofi SA’s decision to route the acquisition through its listed subsidiary. Multinational pharmaceutical companies often route these acquisitions through privately-held companies. Such transactions are rightly perceived as being unfair to the minority shareholders.
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In the past few years, Aventis has adopted a more aggressive approach to growth in India. It has expanded its product portfolio and reach to semi-urban and even rural areas. It forms a key part of the parent’s growth strategy for emerging markets, including India.
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Aventis will add Universal’s nutraceuticals business, comprising 40 brands, related marketing and distribution, and 750 employees. In 2010-11, Universal’s sales amounted to Rs110 crore, or about 10% of Aventis’ 2010 sales. The acquisition’s impact on revenue may not be substantial, but may contribute to higher growth. The market for nutraceuticals is estimated to grow 20-30%, while Aventis’ domestic business grew about 12% in the six months ended 30 June.
Nutraceuticals are a diverse set of products in the health and wellness space, with both pharmaceutical and food firms jostling for a share. Universal markets vitamin and mineral supplements, products for bone-related ailments, and liver tonics among others. Its website lists products in as many as 15 categories, which are retailed through three divisions reaching out to 60,000 doctors.
The consideration has not been disclosed, but Mint reported a figure of Rs500 crore. That appears expensive, but reflects a trend seen in recent deals in the pharmaceutical industry. It is also in line with Aventis’ own valuation, with a market capitalization to sales ratio of about five times. Aventis had cash of Rs513 crore as of 30 June, enough to fund the deal, but it may also raise some debt to retain liquidity.
The deal is likely to be completed in the last quarter of 2011. One impact will be a sharp drop in Aventis’ other income that contributed about 20% to its earnings before interest and tax.
Employee costs will soar, too. That will nullify, to some extent, the addition to profits. But that really depends on how profitable the business is, which has not been disclosed.
The valuation seems to indicate good levels of profitability. This will become evident in the first quarter of 2012. What matters in the longer term is how Aventis manages the acquisition. Cultural integration is a critical aspect in such deals. Then comes realizing the touted benefits—can it expand the acquired business faster than the current owners, and at the same time, lower costs?
That will determine eventually if it was worth paying a substantial sum. Otherwise, shareholder enthusiasm, as visible in the jump in its share price, will begin to wane.
Graphic by Yogesh Kumar/Mint
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