Deal Analysis - Emami Acquisition of Zandu in 2008

Background on Emami

• The Rs 600 cr Emami Group is one of the leading Indian Groups in personal and healthcare products industry.
• Established in 1974 Emami manufactures and markets trusted power brands like Boroplus, Navratna, Fair and Handsome, Sona Chandi, Mentho Plus, and Himani Fast Relief.
• Emami’s brands and their extensions occupy leadership in most of the categories like antiseptic creams, cool oils and pain relief ointments and it has been a pioneer in introducing the first fairness cream for men in the world.
• Maintaining a CAGR of 25% Emami has footprints in 60 countries across the globe spanning over Middle East, Europe, Africa, CIS and the SAARC.
• The plants and production activities of the Group are currently in West Bengal, Pondicherry, Assam, Gujarat, Orissa, Uttaranchal, and Himachal Pradesh.
• Today, advancing with increased momentum, Emami is a coveted Rs 1600 crore Group.
• In East India Emami occupies leadership in sectors such as newsprint, private hospital, edible oil, bio-diesel and real estate.
• Emami also has presence in ball pen tips manufacturing, contemporary art and retail chain with Frank Ross and Starmark The group has signed a memorandum of understanding (MoU) for setting up a cement plant at Chattisgarh.

Future Growth Plans of Emami

• Emami is on a look-out for further acquisition opportunities nationally and internationally and ready to walk the path of inorganic growth
• It plans to position itself as a “food products and personal care major”. Food products and personal care comprise the biggest slices of India’s Rs 96,000 crore FMCG pie, accounting for 43 per cent and 22 per cent, respectively
• It plans to diversify into over the counter herbal herbal and ayurvedic medicine which is an approx INR 7,500 cr market
• It wants to become a serious player in the FMCG segment and it cannot become a serious player by merely changing or rearranging the existing product categories

Background on Zandu (Target Company)

• Zandu’ more than century old household name in India and leading players in the healthcare system of Ayurveda with products including the popular Zandu balm, general fitness medicine, Kesari Jivan, Zandu Chyavanprash and digestive tonic Zandu Pancharishta. 
• The net sales for Zandu stood at Rs 168.8 crs for the year ended March 2008, growing at a CAGR of over 11% over the past four years. 
• The Company has strong research base with slew of products in the pipeline at various stages. 
• Zandu has a number of world class manufacturing facilities and technologies in the field.

Why Zandu as a Target???

• Strong brand name, 100 year old company 
• Attractive target for domestic and international FMCG players 
• Zero debt company 
• Product portfolio consists of more than 300 herbal and ayurvedic products 
• Zandu has a tremendous business potential which can be exploited with strong marketing, R&D and other operating efficiencies coupled with long term entrepreneurial vision. 
• Emami with its strong marketing acumen and operational efficiency can help Zandu reap its true potential

Benefits to Emami upon Acquisition

• Before Zandu came into the fold, Emami was the market leader in two niche categories: Boroplus cream, with 70 per cent, led the Rs 190 crore antiseptic creams market, and Navratna, with over 50 per cent, headed the Rs 397 crore cooling oil category. 
• With the Rs 120 crore Zandu Balm in its fold Emami leads the ‘rubificient’ (local pain ointment) category with a combined market share of more than 25% 
• Zandu’s Special Sona Chandi and Kesari Jeevan Cyawanprash will give Emami a larger market share in the Rs 170 crore Cyawanprash category, which is currently dominated by Dabur having 61% of the market share 
• Consolidation in the ayurvedic medicine market which currently is led by Dabur with 10% market share 
• Take advantage of product improvisation, customisation and price variations 
• Stage to become a serious FMCG player

Valuation of the Deal

Movement in Share Prices

M&A strategies applied in this deal:

1. Shark Repellant strategy by Parikhs:

• Increased its stake in zandu by 1.4% between June 13 – 19 , 2008 
• Did not register stake sale by vaidyas to emami , as he had the right of first refusal in respect of the shares sold by the Vaidyas. 
• Filed petition against Emami in SEBI hence caused open offer by emami delayed by 3 months

2. Squeeze out Strategy by Emami:

• It is a merger tactic which is used to bring the entity opposing the deal on the negotiating table 
• Emami eventually managed Parikh to come on the negotiating table and sell his stake.

Deal Time Line:

29 June 08:

• Emami bought 23.6% stake in Zandu 
• Deal value : Rs 130 cr 
• Paid Rs 6900 per share through off market deals with the vadiyas , one of the promoter groups of zandu 
• Emami Already having 3.7% stake 
• Total holding in zandu 27.5%

2 June 08:

• Open offer was made by emami to acquire upto 20 % stake in zandu 
• Open offer price : Rs 7315 per share 
• Dispute initiated with Girish Parikh , one of the promoter who holds 22 pc in the zandu 
• Zandu’s allegation “The purchase of shares from the Vaidya family in two tranches, indicated that Emami had already decided to acquire more than 15 per cent, hence violating the SEBI Takeover Regulations (1997) 
• Matter moved to SEBI who transferred it to CLB ( company law board) 
• CLB held back open offer by emami till further decision

12 Sept 08: 

• SEBI clears open offer for zandu 
• Emami doubled open offer price for Zandu pharma from Rs 7,315 to Rs 15,000 
• Open offer commenced on September 26 , 2008 and closed on October 15, 2008

16 Oct 08: 

• Parikh gives in , Emami wins zandu 
• Sold 18.8 pc stake at Rs 16,500 a share 
• Emami got controlling stake 
• Deal value : Rs 242 cr 
• Deal includes non competing fee of Rs 1500 per share 
• Bought Rs 54 crore worth of Zandu shares from the open market 
• Post the open offer Emami controls 66 % stake in company 
• Emami payed close to Rs 700 cr for zandu 
• Zandu became Emami’s fully owned subsidiary

1 Dec 08:

• Made Zandu pharma its subsidiary 
• Emami plans to merge Zandu surfaced 
• Planning to raise $50m through private equity funding by selling 15% of equity 
• Planning to hive off Zandu chemicals as it is making loss

Current global credit crisis: Is India vulnerable too?

The current economic crisis that started off as a sub-prime crisis in the US housing mortgage sector has snowballed into the largest credit crunch the world ever faced since the Depression of 1929. When the crisis erupted, there were some premature talks among the Indian policymakers that India would relatively be immune to this crisis but the fact remains that no country has been spared from this crisis.

India has been one of the strongest performing economies over the years registering growth rates of over 8% for the past four years. Although India has not faced a financial meltdown of the kind experienced in the US, owing to its strong fundamentals, well regulated banking system and controls on domestic finance, it has experienced the knock-on effects of the global crisis. Following are some of the major impacts on the Indian economy:

Firstly, the immediate impact has been the outflow of FII’s from the Indian equity markets in order to cover losses in their home countries and seek havens of safety in an uncertain environment. In 2007-08, net FII inflows into India amounted to $20.3 billion. As compared with this, they pulled out nearly $13 billion in the year 2008-09 resulting in a net outflow of FII money from India, the first time in 11 years. Given the importance of FII investment in the Indian stock markets, this pullout triggered a free fall in the BSE sensex from its closing peak of 21,000 in January 2008, to sub -9000 levels in early months of 2009, eroding millions of investor money.

Secondly, this reversal of capital flows has led to a sharp depreciation of the Rupee; the Rupee fell from Rs 39.20 to the dollar to Rs 48.86 between January 1 and October 16, 2008. While some argue that this depreciation may be good for India’s exports which have declined sharply due to the slowdown in global markets, it is not so good for those who have accumulated foreign exchange payment commitments.

Thirdly, it is a known fact that credit financed consumption and housing underpin the 8% growth trajectory India has been experiencing over the years. In this uncertain environment banks and other financial instructions have cut back on credit, especially the huge volume of housing, automobile & retail credit given (auto loans increased marginally by 1.2% in the year 2008 as against a 30% increase in the previous year whereas loans to finance consumer durable fell by 33% in the year 2008). India Inc. which till now did not have any problems in finding money to fund their acquisition and expansion plans is also finding the going tough due to this curtailment of credit.

Fourthly, this crisis has forced many companies to resort to drastic measures in order to reduce costs and cover their losses. Some of the measures include layoffs, salary cuts, bonus cuts and freeze on hiring. This has led to an increase in the un-employment rates in India and the world over.

Lastly, the indirect impact is in the form of the losses sustained by non-bank financial institutions especially mutual funds, as a result of their exposure to domestic stock and currency markets. Such losses are expected to be large, as signalled by the decision of the RBI to allow banks to provide loans to mutual funds against certificates of deposit (CDs) or buyback their own CDs before maturity. These losses are bound to render some institutions fragile, with implications that would become clear only in the coming months.

In conclusion, we can say that India is neither thrashed nor is safe from the crisis and if the Citigroup’s Vulnerability Index is any indicator then India remains the most vulnerable economy in the Asian region.

Emerging markets: Have they decoupled from the rest of the world?

The decoupling theory caught the fancies of the world when until last year the gradual slowdown in the US had little or no effect on the growth of the other countries and trade linkages with the US had become less important. The subprime crises which started in the US has now become a more insidious paralysis of credit conditions moving across different markets and thereby questioning the very essence of the decoupling theory. But in my view there are signs that the decoupling theory is in fact true at least to a certain extent. Let us examine them below:

Firstly, linkages between the emerging economies have strengthened. As per the IMF data the emerging markets trade with the group of advanced economies as a share of the emerging market total trade has declined from 70% to 50% whereas flows between emerging-market economies have more than doubled in the past two decades. For instance, demand for commodities from large emerging markets like China and India has bolstered growth in commodity exporters such as Brazil, Chile, and Russia.

Secondly, financial flows between emerging economies have increased. China gets nearly two thirds of its foreign direct investment from other Asian emerging countries. In turn, China has begun to undertake substantial investments in many commodity-producing countries. Other emerging markets also have built up massive stocks of foreign exchange reserves. All of this makes emerging markets as a group less dependent on financial flows from advanced economies.

Thirdly, although some emerging markets are highly export dependent, countries such as the BRICs nations are large enough to have sufficient diversity and a growing domestic demand. As per recent Merrill Lynch estimates, emerging economies could spend as much as $6.6 trillion on infrastructure in coming years. Although some projects have been delayed or cancelled due to the global slowdown, the opportunities are substantial. Also with more than 1.3 billion people in China, 1.1 billion people in India, 190 million in Brazil, 140 million in Russia, 85 million in Vietnam, 71 million in Turkey—and hundreds of millions more in other emerging economies, the potential for growth is huge.

Lastly, global stock market events since late October seem to underscore the theory. While October/November was the tough for emerging markets as a whole, the major US, European, and Japanese markets fared badly after this period. Despite the sharp recovery in March, the developed markets are still just near their October levels. With some exceptions (Eastern Europe and Mexico), the emerging markets are well above these lows suggesting strong fundamentals and healthy financial position.

In conclusion, we can say that no longer is it such that when the US would sneeze, the whole world would catch a cold. The emerging economies are now viewed as the drivers of growth in the global economy and the emerging markets have indeed decoupled from the rest of the world to a certain extent, but not completely.