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.