The addition of the Yardley product range to its existing portfolio of consumer products is a good move by Wipro Ltd. But the acquisition will pay off only if the business is scaled up and its current higher margins are sustained. This is Wipro’s second international acquisition in the consumer products space after it bought Unza Holdings Ltd, an Asian personal care and household care products maker, in 2007. That acquisition has done well, growing by 17% in the first half of fiscal 2010, much higher than the 11% overall growth of the company’s consumer and lighting business.
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The company will pay $45.5 million, or around Rs214 crore, to acquire the rights to Yardley brands in Asia-Pacific and North Africa. These regions earned $24 million in revenue for the company in 2008, which results in a valuation of a little less than two times revenue. Wipro will also get the people and the distribution networks, but no fixed assets are changing hands.
Considering that Wipro had paid around 1.5 times revenues for Unza, a valuation of 1.9 times for Yardley’s rights seem a tad high. Unza’s brands, too, were in the premium range. But note that Yardley is growing at a faster rate, and its potential for sustaining or even increasing growth rates seems to have been the key consideration. Currently, Yardley’s revenue growth in Asia, Asia-Pacific and North Africa is 25%.
There is potential for stepping up the growth rates. India, for example, is only 19% of revenue, or barely Rs20 crore. Theis comes from soaps, shaving creams, talcum powder and deodorants. West Asia contributes around Rs80 crore, and will double Wipro’s turnover in this region. South-East Asia and other countries contribute just 11% of revenue. Now, Unza’s main markets are in South-East Asia, with Indonesia, Vietnam, Malaysia and China being key markets. Wipro can drive penetration in international markets through Unza’s network and also seek operational synergies.
In terms of size, the Yardley business will add around 5% to Wipro’s consumer and lighting business, but its contribution to margins may be higher. The company has not given figures, but said that the acquisition will be earnings accretive. That is indicative of relatively high margins as there will be a goodwill amortization charge on the brand rights that have been acquired.
The financial implications apart, Wipro stands a better chance of making this acquisition work after the Unza buy, which now contributes to 45% of its non-durable goods sales. That experience may shorten the time taken to integrate the new business, and start scaling it up. One can expect the brand to become more visible in India, where Wipro has strong relationships in both retail and modern trade.
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