Is the Reckitt Benckiser’s Deal to Buy Paras Pharma Free from Behavioural Biases?

On the second Sunday of December 2010, the UK based consumer goods giant Reckitt BenckiserGroup, Plc. (RB) announced that it is going to buy privately held Indian company Paras Pharmaceuticals in an all-cash deal for about $ 726 million. Given that India is a promising market for healthcare, the deal is expected to give desired strengths to RB’s presence in India. RB has a portfolio of personal and healthcare products such as Dettol, Dispirin, AirWick, Durex, EasyOff Bang, Clearasil and so on in Indian space.

The target Paras Pharmaceuticals, an privately held company promoted by Patels of Gujarat (India) has a very strong presence in Indian personal and healthcare market with high value brands such as D’Cold, Move, Krack, ItchGuard, RingGuard, Dermicool, Borosoft, Livon, Recova, Set Wet, etc. The company had reported a sales of INR 4.01 billion with an EBITDA of INR 1.08 bilion. The company’s 63% equity is held with the US-based private equity firm Actis Capital LLP, while the promoters the Patels have 23% stake in the company.

With this deal, the PE firm Actis Capital is set to gain almost three-fold value of its initial investments (in two tranches)worth $135 million into 63% of Paras Pharma. They all will make the best of the deal. The promoters will receive around $218 million for their 23% stake in the company they built over last 25 years.

Now, let’s take a look at whether the buyer firm, RB is paying appropriately for an unlisted firm. What will it make out of this (so called) over-valued deal?

The UK major will bring on its board a strong portfolio of big established brands in over-the-counter, health and personal care space, which are very complementary to its existing business. The Paras’ brands, growing at 25-30%, are niche and underpenetrated, with a big scope for growth, especially in an emerging market context.

There were also the reports of many other competing bids form diverse companies of which Emami was offering much higher than the bid from RB (it is said that Emami had offered INR 3400 crore, about 5% higher than the accepted bid); but it is also said that the promoters, the Patels were little apprehensive of selling their stake to an home-grown firm, i.e. Emami. Some said that the British firm was preferred over the Indian bidder because of some racial issues. Though Paras founder and chairman Girish Patel said: ‘‘We have been on a rewarding journey with Actis. I believe RB will take our already strong brands to the next level.’’

But, overall, it can be said that its not only the monetary value that is offered for acquiring any company’s stake, that matters, but also the behavioural issues pertainingto the stakholders do matter significantly. Otherwise, why a higher bid from an Indian firm would be rejected to accept a lower bid from foreign firm. Of course, the role of negotiations made by the mediators (the investment bankers and advisors) can also not be ignored in settling any such deal. Here it would be necessary to mention that Emami had appointed Anand Rathi and Macquarie as investment bankers to the deal, while Actis was advised by Morgan Stanley and Reckitt Benckiser by JP Morgan.

So, shall we assess the behavioural issues associated with M&A deals?? The future of such deal will tell us!!!

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