Fast moving consumer goods company Dabur India Ltd has paid a substantial premium to acquire Fem Care Pharma Ltd.
Companies normally pay a high premium for strategic control, but in this case, the premium is as high as 140%. Fem Care’s shares traded at about Rs330 before news reports first emerged in mid-October about Dabur’s interest in the firm. The acquisition price of Rs800 per share values the firm at about Rs300 crore or 2.7 times trailing 12-month revenues.
So why is Dabur paying such a high premium at a time when the markets have corrected by 60% and the economy is headed for a slowdown? The company’s bullishness seems to stem from its success in integrating the earlier acquisition of Balsara. It has been able to scale that business well, while on the other hand success with its own new launches has been limited. This perhaps explains its keenness in acquiring another firm with established brands.
Dabur’s estimates of scaling up the business using its own distribution as well as extracting other synergies are likely to have been more aggressive than other firms who considered buying Fem. According to news reports, the Godrej group and Marico Ltd were also in the fray.
Further, while the acquisition price may now seem steep, it’s important to note that niche players such as Fem Care are likely to see a significant improvement in margins in the near future.
The company has a strong market share in the fairness bleach and hair removal categories. While commodity prices have eased, it’s unlikely that this benefit will be passed on to consumers in these categories, given a relatively high level of consumer loyalty for such products. Based on Fem’s results for the first half of the current year, profit before tax (PBT) stood at Rs12.65 crore, representing a high margin of 23.2% on revenues of Rs54.47 crore. But it’s important to note that PBT margins for the year till March were just 9.24% and the high margins so far this fiscal seem to be an aberration. Based on last year’s financials, overheads such as advertisement expenses are disproportionately higher in the second half of the year.
For now, Fem Care’s promoters are the biggest gainers, followed by its minority shareholders, who can sell a large part of their holding in the open offer at Rs800 per share. If all shareholders tender their shares in the offer, about 60% of each investor’s holdings will be accepted in the offer. The gains to Dabur shareholders will depend on whether the company can repeat the success of the Balsara acquisition with Fem Care.
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