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The Jyothy Labs stock plunged 11.5 per cent in Thursday's trading, after the company announced its decision to buy a 14.9 per cent equity stake in detergents and household products maker Henkel India.
While the price for this particular transaction appears to be quite reasonable, investor worries centre around whether Jyothy Labs will now embroil itself in an aggressive bidding war for a majority control in Henkel India, draining it of its cash resources.
Given the paucity of acquisition candidates in the FMCG space, any majority stake sale by Henkel India is likely to attract much larger suitors, who may have deep pockets to fund their bids. Potential bidders may also have to shell out fairly stiff valuations going by previous FMCG deals.
Discount may not last
On the face of it, Jyothy Labs appears a good enough suitor for Henkel India. Henkel India's brands are established mainly in detergents (Henko, Mr. White), soaps (Fa, Margo) and household products (Pril, Brisk) and may neatly complement Jyothy Labs' portfolio spanning fabric and home care (key brands — Ujala fabric whitener, Exo dishwash, Jeeva soap, Maxo insect repellents).
Hurdles to buyout
The price that Jyothy Labs has now shelled out for the purchase of the 14.9 per cent stake (from erstwhile promoter Tamilnadu Petroproducts) too doesn't seem exorbitant, as the price of Rs 35 a share is at a steep discount to Henkel India's prevailing market price (Rs 45) on Wednesday, when the deal was inked. However, if Jyothy Labs' intention is to gain control of Henkel India's brand portfolio, it will have to take its equity stake in the company to much beyond its current 14.9 per cent.
To buy out the parent — Henkel AG's 50.9 per cent stake in the Indian arm — at current market prices the outlay may be as much as Rs 207 crore. That is four times the operating cash flows (Rs 50 crore) generated by Jyothy Labs in 2009-10.
Given the escalating competition and advertising spends in the detergents space, the company may need all the cash it can spare to defend market share in this segment. Valuation multiples could also escalate much above the current levels, if two or three larger bidders enter the fray.
Given that quite a few of Henkel India's detergent and other brands (Henko, Mr White, Pril and Fa) are from the parent's global portfolio, an outright sale of these brands to an Indian suitor is unlikely too. Therefore, any new Indian company in control of Henkel India may be able to acquire ownership only of home-grown brands such as Margo, Neem and Brisk.
Ownership of Henkel India's detergent and dish-wash brands (Henko, Mr.White and Pril) are likely to remain with the parent, with marketing rights in India (if at all this is done) made available through a fee-based licensing arrangement.
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