Investors don’t seem to be too impressed with Godrej Consumer Products Ltd’s (GCPL’s) latest acquisition. On Wednesday, its share rose 0.6% but has declined by 1.9% since last Friday. The company had announced the acquisition of US-based haircare firm Strength of Nature Llc (SoN) to the stock exchanges on Saturday.

This decline is a surprise as GCPL has a sound track record in making acquisitions work. Could the acquisition price be a worry? One doesn’t know as the price has not been disclosed. But the amount could be substantial. SoN had annualized revenue of $95 million, or R630 crore in 2015 and is profitable, with an Ebitda (earnings before interest, taxes, depreciation and amortization) margin of 22%. Organic sales growth was in high single digits in the past few years. It has done recent acquisitions too.

This is no distress sale then. If we assume a price-to-sales ratio in the range of one-two times, that’s an asking price of R630-1,260 crore. The actual price could be less or even more. The entire acquisition is funded by low-cost debt, at about 2%, according to Nomura Research. And GCPL has said this will be EPS-accretive in the first year, meaning even after servicing the debt, it will be profitable. EPS is short for earnings per share.

Foreign currency debt is, however, a risk when exchange rates are volatile. At the lower price range of R630 crore, GCPL’s books will see a 26% increase in debt. On the flip side, a debt-funded acquisition can also instil discipline that comes with having to service the debt.

GCPL is adding SoN’s wet haircare products to its portfolio of dry products which are sold in Africa. It had already started building a wet haircare business there and the SoN acquisition should accelerate that process.

In the US, the market size for wet haircare products is $800 million but it is also a sizeable $1 billion in Africa. GCPL’s plan is to expand sales in the African market, where its existing set-up gives it an edge. If that works, then SoN’s sales growth will expand at a relatively lower cost, adding to profits. That will take some years to become visible. Then the acquisition will be applauded.

Till then, investors may be right to be concerned. Africa’s economic growth has been hit in recent years. Still, GCPL has done reasonably well there, in constant currency terms. Right now, investors may have been enthused if the price looked attractive. Not knowing the price and a likely substantial increase in debt means there is no visible wow factor for them in this acquisition. It is back to watching for signs of improvement in domestic consumption in both urban and rural markets, and improvement in major international markets such as Indonesia and Africa.

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