Thursday, January 21, 2010

Game for more

T his new year began with Marico Ltd, the mid-sized fast moving consumer goods company, announcing a major acquisition. This time it was the hair care brand Code 10 of Malaysia. The trend of smaller FMCG companies such as Wipro, Godrej and Marico steadily building their portfolio of international brands continues, but whether such brands have been adequately leveraged remains an open question. However, it is the ‘healthy balance sheet' of such FMCG majors which makes it possible for them to graduate from organic to inorganic growth.

“Smaller FMCG companies such as Godrej and Marico have had excellent organic growth. But considering the paucity of good-quality Indian brands and their disproportionate brand values, they are unrealistic buys. However, there are international companies with high equity brands available at a good price and there is bound to be more of such cherry picking for international brands among Indian FMCG companies,'' observes M. Unni Krishnan, Country Manager of brand valuation firm Brand Finance.

Last month FMCG major Godrej Consumer Products Ltd (GCPL) decided to raise funds up to a limit of Rs 3,000 crore through a combination of debt and equity instruments to buy out smaller companies. Announcing the decision, Dalip Sehgal, Managing Director, GCPL, said, “The equity dilution would be limited and it would be more of debt which would be raised for onshore and offshore acquisitions.'' Considering there is a possibility of buying out the balance 51 per cent equity in the Godrej Sara Lee joint venture, the funds would also be utilised towards this purpose. As Sehgal said, “We would need upto Rs 800 crore to buy the remaining stake of Sara Lee in the joint venture company. Besides, the rest of the funds would be used for acquisitions in categories such as household insecticides, hair colours and personal wash. We would be acquiring brands in categories in which we already exist and those that are adjacent to it.'' In the past GCPL has acquired hair care brands such as Kinky and Rapidol in South Africa and Keyline Brands in the UK.

Today there is no stopping the owner of brands such as Cinthol and Colour Soft – there are unconfirmed reports suggesting that it is close to acquiring an Indonesian household company (Megasari) next, apart from bidding for the global pesticides business of joint venture partner Sara Lee.

GCPL's management's outlook is positive towards the acquisitions strategy. “Aside from organic growth, acquisitions both in India and globally of brands and businesses that GCPL believes have the potential to deliver EVA (economic value added) positive returns in the medium term will continue to be a growth strategy for the company in its endeavour to enhance its competitive position, drive profitable growth and enhance shareholder value,'' states a report published on the eve of its analyst and investor meet last year.

In fact, the smaller FMCG companies have been becoming more confident making such deals over the years. “Companies such as Godrej and Marico have gone through the value chain and learning curve and now have developed a certain level of comfort. They have now developed enough systems and processes to derive value from some of these undervalued brands,'' says Unni Krishnan.

But there are also risks associated with such acquisitions and FMCG companies do realise that reaping profits may take a while. Commenting on the dangers that go with inorganic growth, a management analysis made by Marico states: “FMCG companies have identified inorganic growth as one of the avenues for growth. They may make acquisitions and enter into strategic relationships in the future as part of their strategy in India and overseas. However, it might be difficult to identify or conclude appropriate or viable acquisitions in a timely manner. Further, the acquisitions may not necessarily contribute to profitability in the short run and divert management attention or require the company to assume a high level of debt or contingent liabilities. In addition, they may experience difficulty in integrating operations and harmonising cultures leading to a non-realisation of anticipated synergies or efficiencies from such acquisitions.''

However, this has not stopped Marico from announcing yet another acquisition this month. After bringing in Egyptian hair care brands such as Fiancée and Hair Code, it decided to add to its international hair care portfolio by buying out P&G-owned hair care brand Code 10 in Malaysia for an estimated Rs 28 crore. With rights to the brand in Malaysia, Singapore and Brunei, Marico is already hoping to bag a 10 per cent share in the Rs 200-crore hair care category in these markets.

Says Vijay Subramaniam, CEO, International Operations, Marico, “This is our fourth acquisition in the past three years. We have identified the emerging markets of Asia and Africa as the growth avenues. We expect our international operations to grow in excess of 20 per cent in the next three years.'' Marico has also got some niche hair brands in South Africa and a couple of soap brands in Bangladesh.

According to Deepti Singh, Research Analyst at Fortune Financial Services India, “During the past few years, some companies in the sector have used the inorganic route to grow at a faster pace. They expect to derive the key benefits of a diversified portfolio – impressive growth rates, larger customer base, to mention a few – and transform themselves from Indian majors to global conglomerates.”

At the same time, most of the international FMCG companies are going through a rough patch given the current economic scenario in some of their respective countries. As Brand Finance's Unni Krishnan says, “FMCG companies in developed countries are facing a tough time in their markets. Given that scenario, it may not be surprising if more targets appear on the horizon for Indian FMCG companies.''

But on the face of it Indian FMCG companies' acquisition spree has not been adequately leveraged. “Indian companies have a tendency to leave the acquisitions alone and do not believe in changing the management team. While they may not want to radically alter the brand they must do specific things in marketing as the optimal value of the brand is not being leveraged, ‘'observes Unni Krishnan. Take the case of Tata's acquisition of the Tetley brand in the UK, where it has almost taken a decade for the Tatas to get some value out of the brand. Considering that the Indian Managing Director of Tata Tea, Percy Siganporia, recently re-located to London to take charge of the Tetley operations, this in itself has set the ball rolling for the Tetley brand, believes Unni Krishnan. “Indian companies are generally risk-averse and thereby lose out on significant opportunities to grow the value of the brand. While none of the acquisitions have been a disaster, neither of them have delivered full value for such brands,'' he adds.

However, now the ‘full value' of such acquisitions will soon get reflected on the balance sheets of companies with the implementation of the IFRS (International Financial Reporting Standards) Act. “IFRS 3, which will become mandatory in all M&A transactions, requires brand and identifiable intangible assets to be recognised on the balance sheet of the acquiring entity. All companies are being called upon to shine a light onto goodwill - the raison d'etre of future economic value which will provide managements a better and more objective understanding of value of these precious intangible assets, which are often least understood in deal-making,'' explains Unni Krishnan.

As the overseas brand acquisition spree continues, both big and small FMCG companies hopefully will now be in a position to leverage the intrinsic value of the acquired brands.