BackJyothy Labs takes Henkel deal to logical conclusion
Jyothy Labs takes Henkel deal to logical conclusion
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Jyothy Laboratories Ltd said on Wednesday it plans to merge Henkel India Ltd with itself. The timing is right, as Jyothy’s shares have appreciated, and the performance of both entities is improving. Earlier this week, Henkel said it will seek shareholder approval for two proposals: to change its name to Jyothy Consumer Products Ltd, and to change its incorporation documents to permit a merger or amalgamation process.
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Jyothy Laboratories acquisition of Henkel India appears to be nearing conclusion. Mint’s Ravi Ananthanarayanan says Henkel is still seeking shareholders’ nod for certain changes, but Jyothi has made progress on the integration process, which is in its second phase now.
In the first phase of integration, Jyothy had combined corporate functions, rationalized production and supply chain functions, and started the process of integrating marketing. The second phase is under way and is to be completed in 2012-13. It will see a new management and a new sales strategy put in place at Henkel, and seeks to better utilize the combined distribution network.
In 2011-12, Jyothy’s performance had suffered after it changed its distribution structure. Concerns about how long that would last, and high interest costs due to acquisition-related debt had weighed down valuations. But the past few quarters have seen its performance recover. This was visible in the March quarter, too.
Jyothy’s sales rose by 32% year-on-year to ₹ 219 crore while its Ebitda (earnings before interest, taxes, depreciation and amortization) margin rose by 490 basis points to 16.6% (though it was marginally lower than the December quarter). A basis point is 0.01 percentage point. Its full-year sales growth was only 10.5%, chiefly due to the changes done to its distribution structure. Henkel’s performance, too, has improved, with sales growth improving.
The real benefits of the synergy will be felt when Henkel’s sales come back to earlier levels, and the combined entity delivers much better sales and profit growth, than the two firms did individually. Jyothy sees 2012-13 to be a relatively sedate year for Henkel, with sales rising by 12%, though profitability will rise. But after that, it is expecting a spurt in sales growth, and a steady improvement in profitability. That makes 2012-13 the right year for a merger. Jyothy’s valuations are up, and Henkel’s performance will not weigh down the merged entity’s performance.
Henkel had a negative net worth of ₹ 360 crore as of 31 March. At a time when Jyothy’s own performance was under pressure, the merger would have only added to it. Now that Jyothy is back on track, the accumulated losses can be useful in lowering its tax liability. It had an effective tax rate (tax as a percentage of profit before tax) of 34% and if the merger lowers that, it will boost earnings growth to that extent.
Good earnings growth and merger-related synergies should see its valuations rise—its share is already up 84% since November 2011, though that of Henkel is still depressed. Using their current share prices as an indicator, the merger ratio could see 1 share of Jyothy being issued for every 9.2 of Henkel, and if we assume that Jyothy’s 84% stake in Henkel will get extinguished in the merger process, the equity dilution works out to just 2.5%. Jyothy may also decide to capitalize on its improved share valuation by issuing fresh equity later, and using the proceeds to repay debt.
Also See | Quarterly performance (PDF)
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