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Rhone buyback: Pros and cons - Views on News from Equitymaster
 
 
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  • Feb 6, 2001

    Rhone buyback: Pros and cons

    The open offer, which Nicholas Piramal made to the shareholders of Rhone Poulenc (Rhone) is still on. Should shareholders of Rhone Poulenc accept it?

    Rhone has top of the line brands such as its cough syrup Phensedyl (number two after Pfizer’s Corex), a children’s cough syrup Tixylix, an anti–amoebic Flagyl and an anti–epileptic Gardenil. Secondly, the company has restructured its workforce by reducing its unskilled workers by over 600 people and increased its marketing team by 75 people to 375 medical representatives currently. Third, the company upgraded its Paithan plant (in Maharashtra) by additional investments recently. This helped it reduce the cost of material by nearly 10%. These were the reasons for a host of Indian companies bidding for the company.

    As to the question as to why Aventis wanted to sell its stake in the company, the one plausible reason was that Aventis’ pharma operations are prescription led whereas Rhone Poulenc India has over the counter brands such as Phensedyl. Secondly, its French parent (now a part of Aventis) has sold off its older brands and is more interested in therapeutic areas such as oncology where it has got blockbusters such as Taxotere. And finally, there is an overlap in the field force of Rhone Poulenc India and Hoechst Marion. Aventis possibly found it safer to sell the company rather than go through another painful round of restructuring.

    For Nicholas it made sense to takeover Rhone. Apart from the fact that the company has had notable over the counter brands, Rhone also has prime properties in Central Mumbai and Ballard Estate. Nicholas had also expanded its capacity in Pithampur (MP) which could be used to manufacture Rhone’s products. Besides, its large field force of over 1,100 people could be used to cross sell Rhone’s products as well.

    However, the fact remains that it is only a matter of time (two years at best) till Rhone were to get merged with Nicholas Piramal. And it is the anticipated merger ratio that could well decide Rhone’s valuation in the future. The stock currently quotes at a price of 795, which implies an earnings multiple of 10 times FY01 earnings. The open offer is at Rs 875. It would be better for shareholders to take the open offer, as there is still some uncertainty regarding the merger ratio.

     

     

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