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Godrej Consumer: GSL acquisition - Views on News from Equitymaster
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Godrej Consumer: GSL acquisition
Jun 1, 2009

In uncertain times, companies under the same group look for synergies that optimize economic benefits. The Godrej Group had formed an FMCG group to look at synergistic benefits in its FMCG businesses and how the companies in similar space could cooperate with each other to create value. Last week, the company decided to consolidate its 49% holding in Godrej Sara Lee (GSL) in another group company Godrej Consumer Products (GCPL) to gain benefits. We give detailed analysis of the deal in this article. GCPL acquires 49% stake in GSL
The consolidation is being done through the merger of Godrej ConsumerBiz Private (GCBPL) and Godrej Hygiene Care Private (GHCPL) into GCPL. GHCPL is a 100% subsidiary of Godrej Industries Limited (‘GIL’) and GCBPL is a 100% subsidiary company of Godrej & Boyce Manufacturing Co. Limited. Appointed date of the merger will be June 1, 2009 and pursuant to the merger, assets and liabilities of GCBPL and GHCPL will be transferred to GCPL .Currently, GCBPL and GHCPL hold 29% and 20% respectively in GSL, making it a total of 49%. Through this merger, GCPL will hold 49% in Godrej Sara Lee.

Godrej Sara Lee
GSL is an unlisted joint venture (49:51) between the Godrej Group and Saralee Corporation, USA. GSL is the market leader in household insecticides, air care and hair cream in India. It has popular brands like GoodKnight, JET, HIT, AmbiPur, Brylcreem and KIWI. Globally, Sara Lee has announced that it would like to sell its household and body care division. If Sara Lee finds a prospective buyer to sell its household care business globally, it may even exit the Indian joint venture. Since it has a prior agreement with Godrej in India and Sara Lee offers to sell its stake in the Indian JV, GCPL would be in a better position to buyout the multinational's 51% holding after the stake consolidation in GCPL. It also has the first right of refusal to buyout Sara Lee's stake.

As per the management, GSL’s size is a little more than 50% of the size of Godrej Consumer Products. It is a very successful company and has similar margins like GCPL. It works on negative working capital.

GSL financials
Particulars (FY09) Rs m
Sales 7,547
   
EBITDA 1,342
OPM (%) 17.8%
   
PBT 1,232
Tax 187
Rate (%) 15.2%
PAT 1,045
NPM (%) 13.8%

Share exchange ratio
Upon merger, GCPL will issue its 10 shares to the shareholders of GCBPL for every 11 shares and 10 shares to the shareholders of GHCPL for every 11 shares. GCPL will therefore issue 51 m new shares, taking its total outstanding shares to 308 m. Post merger, shareholding of the promoter group (Godrej Group holding) of GCPL will increase from 69.73% to 74.77%.

Benefits to GCPL
The group has been looking at expansion and consolidation of its FMCG business. With the stake acquisition, this would now be possible. The proposed consolidation would also strengthen the position of GCPL in the FMCG market and give it the strategic flexibility and scale to pursue growth opportunities. It will also provide cost and operational synergies and widen the brand portfolio considerably. Also in terms of financial benefit, the stake acquisition is adding around 8% to GCPL EPS.

Financial benefit of merger
Particulars (FY09)
GCPL's sales (Rs m) 14,352
PAT (Rs m) 1,733
EPS 6.7
   
49% of GSL's PAT (Rs m) 512
GCPL's PAT post merger (Rs m) 2,245
   
Existing no of shares (m) 257
New shares issued (m) 51
Total shares outstanding (m) 308
   
GCPL's EPS Post merger 7.3
% accretion 8.0%

Thus, the merger would provide GCPL new growth opportunities by widening its portfolio and providing a better bargaining power in terms of distribution.

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