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.