Shareholders dislike big acquisitions. That probably explains the 10% drop in the Godrej Consumer Products Ltd (GCPL) stock last week, after it announced a Rs3,000 crore fund-raising plan to pay for acquisitions. Though no stranger to acquisitions, the company’s market capitalization is Rs7,700 crore, so the size of the acquisition funding is very big for GCPL.
Is Sara Lee Corp.’s residual global business in its sights? Sara Lee is selling its international household and body care business, with Unilever Plc and Procter and Gamble Co. (P&G) having agreed to buy parts of the business. Businesses contributing around €1 billion (Rs6,740 crore) in revenue have been sold, and the residual business accounts for €500 million in revenue. Unilever paid around 1.7 times sales for the body care business and P&G purchased the air care business, which includes air fresheners, for 1.2 times sales.
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What remains is the global shoe care, insecticides and non-European cleaning brands. Valuation would depend on profitability and growth prospects, but it would be reasonable to assume a floor valuation of around 1-1.2 times revenue. GCPL’s war chest appears a little inadequate for this acquisition. But GCPL also owns 49% in a joint venture with Sara Lee, Godrej Sara Lee Ltd (GSLL), that sells brands such as Good Knight, Hit, AmbiPur and Kiwi. So, the sale price could get lowered to that extent.
Sara Lee’s residual global business is a possibility, but what seems more likely is Godrej buying out Sara Lee’s 51% stake in GSLL. When GCPL acquired the 49% stake in GSLL from group companies earlier this year, it issued equity as consideration. This equity had a market value of around Rs870 crore when the ratio was announced. GCPL may have to shell out a similar amount to buy out Sara Lee’s 51% holding, unless the shareholders’ agreement has a different formula. Getting 100% of GSLL will be a valuable win for GCPL. Domestic brands contribute around 85% of GSLL’s revenues. Its consolidated September results included GCPL’s results—Rs140 crore in revenue and Rs22 crore at the net profit level. At 16%, its net profit margin is very good.
Even after paying for full control over GSLL, GCPL will have enough ammunition left for a big-ticket purchase. A large domestic acquisition would be appropriate as most of its acquisitions have been foreign.
Global consumer majors have made India a key fixture in their emerging market plans. Their desire to sell to consumers at all income levels should worry home-grown companies, which have excelled in this area. If multinational companies decide to grow via acquisitions, it would be a bigger worry for Indian companies.
In a market that is fast heading towards intense competition, this may be the time to fill up portfolio gaps before assets turn very expensive. Shareholders may fret for the moment, but unless GCPL overpays, inorganic growth is a smart way to fill up portfolio gaps. Dabur India Ltd has shown that with its successful acquisition of Balsara Hygiene Products Ltd’s brands.
Graphics by Naveen Kumar Saini / Mint
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