Reckitt Benckiser to buy Paras Pharma for Rs. 3260 crore

British consumer goods giant Reckitt Benckiser announced an agreement to buy Paras Pharmaceuticals for Rs. 3,260 crore ($726 million) joining other global companies in adopting acquisitions to increase their presence in one of the fastest growing economies in the world.  

Competition among bidders was fierce with GlaxoSmithKline PLC, Sanofi-Aventis, Novartis AG and US-based Johnson & Johnson vying to acquire the Rs. 400 crore company. Reckitt outbid everyone, paying a steep premium for access to the fast-growing Rs. 8,000 crore Indian OTC market. This is however 25% lower than the earlier expected valuation of $1 billion.  

The Paras deal is the latest example of  MNC giants using acquisitions to bolster their presence in emerging markets to offset slowing growth in developed markets. In May 2010 Abbott Laboratories Inc paid a hefty $3.7 billion for the branded generic drugs operations of Piramal Healthcare.

Reckitt Benckiser itself a product of a December 1999 merger between Britain's Reckitt & Colman and the Dutch company Benckiser, has been very active on the acquisitions front in the last few years:

• Boots' OTC business in 2006 for $3 billion
• U.S. based Adams  in 2008 for $2.3 billion
• Durex condom maker SSL International in 2010 for $3.9 billion

 

Reckitt was interested in Paras' strong position in the OTC Health and Personal Care with brands like:

• Moov, the No 2 topical analgesic pain ointment
• D’Cold, the No 2 cold & flu remedy
• Dermicool, the No 2 for prickly heat
• Krack, the No 1 medicated skin treatment for cracked heels
• Itch Guard and Ring Guard anti fungal creams
• Set Wet, a leading hair gel and deodorant brand

Ahmadabad based Paras generated net sales of Rs. 401 crore and EBITDA of Rs.108 crore in the fiscal year ending March 2010. At the deal value of Rs. 3260 crore, Reckitt is paying 8.1 times sales and 30.1 times EBITDA. This is much higher than comparable deal multiples of 3-4 times sales and 15-20 times EBITDA.

The clear winner is definitely Private Equity firm Actis, which owns 63% of Paras. The value of its 2006 investment in Paras has increased by 400%. Paras' other shareholders include the founder Girish Patel and his family who own around 30% and Sequoia Capital who own the rest of the equity.

What does Reckitt gain from the deal? Simple, exposure to emerging market. Business from emerging markets accounts for around 27% of Reckitt's sales compared to 35% for P&G and 45% for Colgate. Reckitt is paying a premium for full control of a company with strong, market leading brands in an emerging market.

Move aside BRICs, the EAGLES have landed !!

After the enormous marketing success achieved by Goldman Sachs with its BRIC (Brazil, Russia, India and China) report, creating new emerging market acronyms has become the newest fad. HSBC jumped onto the bandwagon with the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and the latest to join the acronym brigade is the Spanish banking group BBVA with its EAGLES !!

Emerging Market Acronym Game (Source: Financial Times)

What the EAGLES approach does differently

BBVA’s rationale is that current groupings like the BRICs pay too much attention to size, and not enough to incremental growth rates.They are rigid and imply an unchanging list of economies on which potential investors should focus. The EAGLES are the 10 countries that will contribute more to global demand over the next decade than the G7 excluding the US. BBVA's economists believe the concept allows better and worse performing economies to move in and out - respectively - of the sample over time.

Ok, so who is it?

EAGLES stands for "Emerging And Growth-Leading Economies" and includes the usual suspects China and India, of course. The other are Brazil, South Korea, Indonesia, Russia, Mexico, Turkey, Egypt and Taiwan.

What's the big deal? Is there anything new?

Nothing much actually. Four of the ten are BRICs and three are CIVETS. The remaining three - Mexico, South Korea and Taiwan - are strong emerging markets since a long time. 

The only interesting thing in the list is in order of importance - Russia is ranked below South Korea and Indonesia. BBVA believes that investors and the general public are still too focused on the BRIC concept. They believe that Russia is not a country which will generate a lot of additional demand and that investors should focus elsewhere.

The link to the report is here.

Standard Chartered predicts a 30 Year Global Boom !!

Even as the developed economies struggle to kick-start growth, Standard Chartered global bank Standard Chartered has come out with a report that predicts a global economic Super-Cycle which they expect will last three decades.

What's a "Super-Cycle"?

The report defines a super-cycle as “a period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanization and technological innovation and characterized by the emergence of large, new economies.

There have been two previous Super-Cycles:

• The first Super-Cycle lasted 43 years from 1870 to 1913. This was the Industrial Revolution that led to rise of America and England and an unprecedented boom in global prosperity.
• The second Super-Cycle lasted 25 years from 1945 to 1970. This was the stunning rise of Japan and Germany as they recovered from the Second World War.

Super Cycle 3?

The report says that we are now in the third Super-Cycle. It began in 2000 and should last until 2030. It will be all about emerging markets (India, China, Indonesia, the Middle East, Africa and Latin America). The key difference is that while earlier super-cycles impacted a small portion of the population of the world, Super Cycle 3 will impact 85 per cent of the world population.

The Losers

Wealthy economies in North America, Europe and Japan will be biggest losers. Their share of  global GDP will drop from 72%  in 2000 to 29% in 2030. Although these countries will benefit from the growth in emerging markets, their economic clout will reduce substantially.

China, China, China

The biggest winner is China of course. The report predicts that the China's economy will be twice as large as the U.S. by 2030. In 2030 China will account for an astounding 24% of global GDP compared to just 9% now.

India will be the other major winner from this generation's Super-Cycle.

By 2012 India will be fastest growing economy in the world. (That's right, faster than China !!) Average annual GDP growth is expected to be 9.3% per year for the next two decades.

Optimistic? Unreal? 

No, not really. In the last decade (2000 to 2010), in-spite of terrorist attacks, wars in Afghanistan and Iraq and an unprecedented Financial Crisis, the global economy has doubled growing from $32 trillion in 2000 to  $64.7 trillion in 2010. Global trade has also recovered to pre-recession levels.

Want to read more?

The report is available as a free download on Standard Chartered's website.

FII investments reach all-time high in September 2010

Foreign Institutional Investors are betting heavily on the India growth story. By the end of September, 2010, the FII investment in calendar year 2010 stood at US $ 28.5 bn, out of which US $ 18.4 bn were in equity while US $ 10.1 bn were in debt instruments.

Figure 1: FII Investments in Equity and Debt (Source: SEBI)

During 2010 the cumulative investments by FIIs in India, has already crossed the highest investments India has ever received in any calendar year. FIIs are the driving force in the market. During the month of September, Nifty has risen by 11.62%.

Figure 2: Total FII Investments (Source: SEBI)

2008 was the only year in which there was a net FII outflow. Inflows rebounded during 2009, almost reaching the 2007 levels. Inflows in 2010 are already 50% more than that received in the whole of 2009. The cap on FII investment in government & corporate debt was recently increased from US$ 20bn to US$ 30bn. A hike in the investment limit was necessary, as FIIs have already reached close to the existing limit of US$ 5bn in government securities & US$ 15bn in corporate debt. Net FII inflow into the debt market has grown over eight times from a little over US$ 1bn in 2009 to a more than US$ 10bn during the first nine months of this year. 

At the current rate FIIs inflows are on track to exceed US$ 40bn by the end of 2010.

Wal-Mart's $4.2 billion bet on Africa

Wal-Mart Stores, Inc. the world's biggest retailer has made a preliminary, non-binding cash offer to acquire Massmart Holdings Limited, South Africa's third-largest store operator by value for South African Rand 148 per share. Massmart, headquartered in Johannesburg, is one of the largest retailers in Africa. The company runs 232 stores in South Africa which account for 92% of its total sales.

Location of Massmart's stores in South Africa (Source: Company Website)

The company operates 24 additional stores in other sub-Saharan African countries. In most countries it has just 1 or 2 stores. The largest presence outside Africa is in Botswana where it has 9 stores. However, sales outside South Africa account for only 8% of its sales.

Location of Massmart's stores outside South Africa (Source: Company Website)

Massmart was founded in 1990 and has grown rapidly through acquisitions - 20 Dion stores in 1993, 14 CCW stores and 26 Game stores in 1998. By the time the company listed on the Johannesburg Stock Exchange in July 2000, it had grown 10 times in 10 years.

Rapid Growth in Earnings (Source: Author analysis, Company Data)

Massmart reported sales of US$ 6.8 billion in its fiscal year, ended in June 2010, up 10 percent from the previous year. While that's a large figure, it will just about move the needle for Wal-Mart which reported sales of US$405 billion in its most recent financial year.

What are the strategic reasons for the deal?

• Wal-Mart is struggling in its home market U.S. where revenues have declined for five straight quarters because of the weak U.S. economy.
• Wal-Mart's overseas business is performing better with sales of US$100 billion accounting for 25 per cent of its total revenue. 
• The company has a strong presence in China, Brazil and Mexico
• The Indian market remains largely closed due to the Government's restrictions on Foreign Direct Investment (FDI) in retail. 
• The deal gives Wal-Mart's a strong position in South Africa a fast-growing market and a foothold in Africa for growth and expansion in other African countries.

What are the risks?

• While South Africa has a fast-growing economy the crime level is high 
• The country has a 24% unemployment rate and high inflation
• Massmart has a heavily unionized work force
• Massmart's same stores sales growth is less than South Africa's rate of inflation. Thus there is pressure of volume growth
• The boost provided by the Soccer World Cup is over.
• The PE multiple for the deal is nearly 26 times. Compared to this, Shoprite, South Africa's biggest listed retailer trades at 21 times. So, this is an expensive deal. There is also the potential of a counter offer which could drive the price even higher.

However, Wal-Mart seems to betting not on the short-term impact of the deal, but on the long-term potential of Africa. The IMF estimates that growth in Sub-Saharan Africa will reach 5% in 2010 and 5.9% in 2011. While that's less than the 9% growth in China and India, it compares well with the average 2% growth expected in advanced economies. After the stunning rise of China and India investors are betting on Africa as the next and possibly last untapped market.

However hype and hoopla aside, returns will take time. South Africa, which is the best economy in Africa has good penetration of modern retail, so Wal-Mart would need to grow business in the other countries. This might be easier said than done because for every relatively stable country like Botswana, there is a disaster like Zimbabwe.

Formula 1 In India: A Winning Formula?

to have a minimum crowd of 120,0002011 is set to be a big year for Formula 1 in India with the inaugural Indian Grand Prix scheduled on 30th October 2011. The circuit is being built by JPSK Sports a company of the Jaypee Group. Considering the growing fan base and the presence of an Indian owned team (Force India), the race will certainly make a major impression on the calendar.

The track design is by Hermann Tilke, renowned Formula One circuit designer. JPSK has planned to have a minimum crowd of 120,000 which is certainly an aggressive target. The contractors for 95% of the work have been appointed and the initial earthwork is already completed.

Indian Grand Prix:Visualization

Indian Grand Prix: Track Simulation

The excitement generated by ex-F1 driver David Coulthard when he drove a Red Bull Racing F1 car on the Bandra-Worli Sealink was immense.

While the event promises to be exciting, the organizers have to focus on the following two points:

• Ensuring plenty of overtaking opportunities to prevent yet another processional race
• Reasonable pricing of tickets

Burp: Burger King sold for $4 billion !!

Burger King announced that 3G Capital will acquire the stock of the Company for $24.00 per share, or $4.0 billion, including the assumption of the Company’s outstanding debt. TPG Capital, Goldman Sachs Capital Partners and Bain Capital Investors, which own approximately 31% of Burger Kings's outstanding shares have agreed to sell their holdings to 3G Capital.

3G is looking at Burger King as a turnaround opportunity. Burger King has been struggling lately. In a communication to investors it anticipated weak demand for its products due to high unemployment in the United States and economic weakness in Europe. It also said that cost of raw materials like wheat and beef could affect its results.

In fact Burger is going private just 4 years after returning to the capital markets. The company was taken private in 2002 by a trio of buyout firms - TPG Capital, Bain Capital and Goldman Sachs Capital Partners. In the last 4 years the company has underperformed its bigger rival, McDonald's. The share price (till before the announcement of the deal) is down 6% from its IPO price 4 years ago while McDonald's has more than doubled in that time.

For a time-line of Burger King's Corporate History visit the following link:

http://www.bk.com/en/us/company-info/index.html

Force India F1 Fourth Fastest in Winter Testing

Formula 1's winter testing season came to close with McLaren's Lewis Hamilton recording the fastest time at Catalunya. Hamilton set the fastest lap time of 1m20.472s in the morning. Last year's runner-up, Red Bull emerged as Hamilton's closest challenger on raw speed. Mark Webber was just 0.024s behind Hamilton.

At this point all eyes were on Michael Schumacher, however the real sensation of the afternoon was another German, Adrian Sutil who went on a string of qualifying runs and set a superb lap time of 1m20.611s only 0.139s slower than Hamilton.

Force India's pace has been acknowledged even by their rivals. After the close of testing Lewis Hamilton said, "McLaren's biggest rivals are Ferrari (Alonso and Massa ), Red Bull (Vettel and Webber), Mercedes GP (Schumacher and Rosberg), and Force India (Sutil).

After last year's successful performance on low-downforce venues like Spa and Monza will Force India graduate to being a consistent point and podium scorer?

For that we will have to wait till the 5 red lights illuminate at Bahrain on 14th March !!

Testing times from Barcelona (Sunday 28 February)

1  HAMILTON    McLaren      1m20.472s (134)

2  WEBBER      Red Bull     1m20.496s (59)

3  MASSA       Ferrari      1m20.539s (105)

4  SUTIL       Force India  1m20.611s (99)

5  VETTEL      Red Bull     1m20.667s (76)

6  SCHUMACHER  Mercedes     1m20.745s (122)

7  BARRICHELLO Williams     1m20.870s (83)

8  KOBAYASHI   Sauber       1m20.911s (67)

9  BUEMI       Toro Rosso   1m22.135s (87)

10 KUBICA      Renault      1m23.175s (106)
11 KOVALAINEN  Lotus        1m25.251s (65)

11 DI GRASSI   Virgin       1m26.160s (47)

Google vs. China

All the discussions about Google's threat to withdraw from the Chinese market have so far have talked about freedom of speech--whether it's good (most people) or bad (some Chinese Government supporters). Many others are of the opinion that Google is trying to make a business decision look like a moral one. So which one is it?

IMHO Google’s decision to stand up to Chinese cyber-oppression is praiseworthy. By announcing that it no longer plans to censor search results in China, even if that means it must withdraw from the country, Google is showing spine — a kind that few other companies or governments have shown toward Beijing. No one was willing to start a confrontation with the Chinese Government. You can justify a lot of things if the pot of gold is big enough.

This move is also in line with Google's move to place its business and ethical interests squarely behind open technologies and open information (which essentially means against censorship). In December, a Google senior vice president, Jonathan Rosenberg, issued an online manifesto which had the following text “There are forces aligned against the open Internet — governments who control access, companies who fight in their own self-interests to preserve the status quo. They are powerful, and if they succeed we will find ourselves inhabiting an Internet of fragmentation, stagnation, higher prices, and less competition.”

Also the argument that Google has been out-competed in the Chinese market is incorrect. In the last 3 years it has managed to penetrate the Chinese search market. Google’s search market share has climbed from 13 percent in 2006 to 36 percent in the fourth quarter of 2009 While Google’s sales in China remain small, the business is growing rapidly and Google just had its best quarter in that country. 

Google’s change of heart in China may not have been solely about freedom of speech, but also about something that strikes at the core of its business: the security of information stored on Google’s servers. Also to the extent that there is any gain from this kind of move, the first company to do it gets all the headlines. The second company to do it will be seen as a follower who didn’t have the courage to act according to its convictions in the first place.

Google is the only entity in the world that has moral authority against China, and they just used it. By publicly challenging China’s censorship, Google has stirred up the debate over the government’s claim that constraints on free speech are crucial to political stability and the prosperity that has accompanied it. Even if it is unlikely to pose any immediate threat to the Communist Party, Google’s move has clearly put the Chinese Government in a difficult position. What could be likely outcome? In a conflict between the Communist Party and Google, the party will win in the short run. But in the long run, my money is on Google.

Google To Exit China ?

On  12th January, Google threatened to pull out of China after it learned of immense security attacks and attempts by the Chinese Government to gain access to the Gmail accounts of Chinese dissidents and human rights activists. Read Google's official statement here. Google agreed to censor its search results in China when it entered the market in 2006. If Google does leave, it would be an unusual rebuke of China by one of the world's largest companies.

Foreign companies already face a long list of obstacles while doing business in China, including “buy Chinese” government policies, widespread counterfeiting and growing restrictions on foreign investment. China has long restricted the sale of foreign movies, books, music and other media. For example, China only allows the broadcast of only 20 foreign movies per year.

When China joined the W.T.O. in November 2001, it promised to allow free trade in government buying. But it has never actually done so, leaving the Chinese government free to use its enormous buying power to steer contracts to Chinese-owned companies. China has also restricted the export of the so-called 'Rare Earth' elements which are important ingredients in things like hybrid engines, magnets used in wind turbines etc. China has become the world’s largest auto market, yet it still limits foreign automakers to 50 percent stakes in auto assembly plants in China and imposes steep tariffs on imported cars.

If Google pulls out of China China could be left with just one major Internet search engine: Baidu.com. Baidu is the clear market leader in China. Refer the market share below:

Considering the size of the Chinese market (300mn plus internet users), the market is considered strategically important. The search market in China reached revenue of two billion yuan ($293 million) in the third quarter of 2009, 28% higher than a year earlier

Google's revenue in China is relatively small. As per analyst estimates only a few percentage points of Google's nearly $22 billion in 2008 revenue came from China. In fact it is possible that Google’s inability to catch Baidu was one reason the company might have decided it was willing to give up on the China market.

Does Google still believe in 'Do No Evil'?
Maybe, maybe not...