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.