Jyothy Laboratories Ltd’s shareholders reacted with dismay at its bid to acquire Henkel India Ltd. Jyothy Laboratories’ shares fell by 12% to Rs203 on Thursday, while Henkel India’s price rose 5%, as a bidding war for Henkel AG and Co.’s 51% stake in the local unit looms ahead.
Jyothy has paid about Rs60 crore, at Rs35 a share, for a sub-15% stake in Henkel India. It has not overpaid, as the price is a 27% discount to Thursday’s market price. At this price, it would pay about Rs200 crore for Henkel India’s 51% stake. A 20% mandatory open offer, at the current market price, will increase the total deal size to about Rs370 crore. This could go higher if Henkel India gets more than Rs35 a share for its stake.
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Funding is not an issue for Jyothy. It has about Rs290 crore in cash and investments, most of which would be available for this acquisition. The debt it will have to raise for the balance portion will not strain its balance sheet, as it has a net worth of Rs700 crore. If Henkel sells its stake for a significant premium over Rs35 a share, which appears unlikely, this could change.
What does Jyothy Laboratories get from this deal? It claims synergies in both companies’ operations. Both are present in home and personal care, fabric care, dish care, and household cleaning products. Henkel India is a multi-product company, but its 2009 annual report shows that detergents alone accounted for more than half of sales. And, soaps contribute about one-fifth to sales. Both categories are seeing severe competition in the market. The market leaders are investing in their brands to grow market share, and are keeping prices low even when input costs are rising. That has made life difficult for the smaller firms as margins have fallen.
Initially, Henkel India ’s losses will affect Jyothy Laboratories’ financials.
Dabur India Ltd’s acquisition of Balsara Hygiene Products Ltd is a good example of how a loss-making business was turned into a sizeable and profitable one. But a crucial difference is that the market for consumer packaged goods was not as hyper-competitive then as it is now. Jyothy Laboratories’ integration efforts and ability to build scale are crucial. If the two firms merge, the accumulated losses of Henkel India will come handy to save on taxes.
But this is in the longer run, before which some financial pain is likely. Jyothy Laboratories also runs the risk of being caught in a bidding war, increasing its acquisition cost. That may explain the Street’s nervous reaction to the announcement.
Graphic by Naveen Kumar Saini/Mint
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