Reckitt's newfound aggression

With the Paras buy, the UK firm has shown it can mean business.

Chander Mohan Sethi, chairman & managing director, Reckitt Benckiser India, hasn’t been able to celebrate his parent firm’s winning bid for Ahmedabad-based Paras Pharmaceuticals. The head of the Rs 2,000-crore Indian subsidiary has been in meetings, morning to evening, for the past few days as he and his team thrash out the way forward following the $12-billion (or, Rs 54,000-crore) Reckitt Benckiser Group’s decision to buy Paras for Rs 3,260 crore.

Reckitt will fund the transaction through internal accruals by the second quarter of next year, Sethi indicated when he emerged from his marathon day-long meeting on December 13, the day it was announced in London that Paras would be acquired.

This came after a three-way fight that saw the British consumer goods major pitted against Japanese drugmaker Taisho and Indian company Emami in the final round of a bidding process that stretched for about two months. Kolkata-based Emami, in fact, had placed the highest bid for Paras at Rs 3,400 crore, but it was Reckitt, with its international footprint and pedigree, that walked away with the deal instead.

In the Rs 1.3-lakh-crore fast-moving consumer goods (FMCG) industry in India, the eight times sales that Reckitt will cough up for the maker of Moov and Krack creams is simply unprecedented. “The norm for FMCG acquisitions here is about three to four times sales,” says Ranjit Kapadia, vice-president, institutional research, HDFC Securities.

Reckitt is clearly paying for the growth it sees for the motley group of over-the-counter (OTC) and consumer care brands that it will now control. “The average volume growth of Reckitt’s base business globally over the last eight quarters has been about 4-5 per cent,” says Navroz Mahudawalla, managing director, Candle Partners, a boutique investment firm based in Mumbai. “Adding a topline of close to $100 million with an ability to grow at about 25-30 per cent year-on-year would add momentum to the overall balance sheet,” he says.

Sethi has made it clear that the parent has no desire to restrict the sale of Paras products to India. “Based on the potential and requirement, we will look to export Paras brands abroad,” said the head honcho of the Indian subsidiary, who is also regional director, South Asia, for the British giant.(Click for graph)

According to analysts, the markets where Paras brands could be exported to include those in Africa and Latin America. “You may find the products making their way to developed markets, too,” says Kapadia.

But that could take a while. Reckitt’s immediate priority remains to be shoring its presence in emerging markets such as India, as it seeks newer avenues of growth as a potential geographical hedge against slow-moving markets in Europe and North America. Its nine-month performance for the current calendar year indicates that developing markets were the fastest growing at 19 per cent to Europe’s -1 per cent and North America and Australia’s 3 per cent.

Though in terms of contribution to overall revenues, Reckitt’s developing-markets slice is small, at 19 per cent to Europe’s 45 per cent and North America and Australia’s 28 per cent, the British major, like most other international consumer goods companies, has great expectations from emerging markets.

Reckitt CEO Bart Becht indicated as much when he said on December 13: “The (Paras) acquisition is another step forward in RB’s growth strategy in consumer healthcare. It creates a material healthcare business in India, one of the most promising healthcare markets in the world, with the addition of a number of strong and leading brands.”

Reckitt, according to analysts, is banking on two growth engines in India: one, its staple FMCG business; and second, its hitherto small OTC business. “The latter has definitely received a shot in the arm with the Paras acquisition,” says Anand Mour, FMCG analyst, Indiabulls Securities.

Reckitt’s FMCG business includes a cross-section of brands in personal care (Dettol, Veet), household care (Harpic, Lizol, Colin, Easy Off Bang, Vanish, Finish, Air Wick), household insecticides (Mortein) and shoe care (Cherry Blossom). OTC, on the other hand, has in-house brand Disprin, as well as Clearasil and Strepsils bought in 2005 from Alliance Boots, the Swiss pharmacy-led health and beauty group, for $2.38 billion (Rs 10,700 crore).

In India, Boots had a joint venture with Nicholas Piramal. But thanks to a 2005 acquisition of Boots’s OTC business, Nicholas Piramal could not lay its hands on Clearasil and Strepsils when it bought Boots’s 51 per cent stake in the Indian JV in 2006. With the addition of Paras’s OTC brands now including category breakers Moov, Krack, D’Cold, Ringguard, Itchguard and Dermicool in its portfolio, Reckitt’s OTC business clearly gets a big boost.

“In one fell swoop, the firm has laid its hands on some very prized brands,” says Mour. “This obviously puts them in the big league now,” says Kapadia. “You can’t take them for granted any longer,” he adds.

Paras management likely to be retained

The big question following the acquisition of Paras Pharmaceuticals has been what happens to the existing management? Will Reckitt replace the current management with its own or allow the incumbents to stay?

It appears that Reckitt has no plans to dump the existing management. Reckitt India CMD Chander Mohan Sethi said, “There are some talented and brilliant people out there. We are open to the idea of retaining the management.”

Officials at Paras indicate that Reckitt is likely to take into account the track record of the management before deciding to replace them. “It is status quo for now,” says Paras Managing Director & CEO S Raghunandan. “Until the time the deal closes, it is business as usual for us.”

As part of the buy, Raghunandan, who has a 2 per cent stake in Paras, will sell his holding to Reckitt for Rs 65 crore, while Actis, the dominant shareholder, will get over Rs 2,000 crore, Sequioa Capital, Rs 228 crore, and promoter Girish Patel and family will get over Rs 900 crore.

Reckitt also gets Paras’s manufacturing facility at Baddi in Himachal Pradesh.

Raghunandan, who is an alumnus of Birla Institute of Technology & Science and Indian Institute of Managment-Calcutta, has been credited with helping the firm maintain its growth momentum since joining the Ahmedabad-based company in June 2008 from Dabur International. Over the last few years, say analysts, Paras has been growing at a steady 25-30 per cent a year, retaining its leadership in most of its categories.