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ITC: Wimco acquisition demystified - Views on News from Equitymaster
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ITC: Wimco acquisition demystified
Jul 4, 2005

ITC, which commands a 70% market share in the cigarette market, announced the acquisition of Wimco 2 days back. Wimco is a Swedish-owned safety matchstick manufacturing company with famed brands like ‘Ship’ and ‘Homelite’. Lets see how this acquisition helps the tobacco major.

Why this move?
ITC, in order to de-risk its high dependence on cigarettes, diversified into other sectors like hotels, information technology, packaging, paperboards & specialty papers, agri-exports, safety match sticks, foods, lifestyle retailing and greetings & stationery. While the businesses may not be the same, this trend of diversification is similar to that of players like Philip Morris. In FY05, non-tobacco FMCG products like retailing, greeting cards, packaged foods, agarbattis and matches contributed to 4.2% to revenues (Rs 5.6 bn). However, these businesses continue to eat into the company’s profits.

A thing or two about Wimco…
Wimco dominates the highly fragmented Rs 13 bn matchstick market with a 13% share. For the first time, Wimco's domination was under threat from ITC, once it launched its safety matches range with brands like iKno, Mangal Deep, VaxLit, Delite and Aim. ITC, which launched its first brand in FY02, has already managed to gobble 11% of the pie. Wimco has been making losses for the last few years (accumulated operating losses of about Rs 600 m). This acquisition will add around 1.7% of FY05 net sales for ITC and 2.9% of total non-tobacco revenues.

Wimco – A snapshot…
(Rs m) FY04 FY05 Change
Net Sales 1,486 1,319 -11.2%
Expenditure 1,507 1,399 -7.1%
Operating Profit (EBDIT) (20) (80) 292.2%
Operating Profit Margin (%) -1.4% -6.1%  
Other Income 48 32 -34.8%
Interest (net) 21 24 12.9%
Depreciation 23 21 -9.9%
Profit before Tax (16) (93) 471.2%
Tax 1 1 16.7%
Profit after Tax/(Loss) (17) (95) 440.0%
Net profit margin (%) -1.2% -7.2%  

The deal…
ITC, through its wholly owned investment subsidiary Russell Credit Limited, acquired 38.5 m shares of Wimco Limited from a Swedish company. Russell Credit also inked a deal with the Swedish company for acquisition of a further 1.04 m shares of Wimco, which translates into a 76% stake in the company. Pursuant to this acquisition, Russell Credit will de-list Wimco from the stock exchanges. Russel Credit has also acquired existing redeemable preference shares outstanding (5.2 m at Rs 100 each and 4.1m at Rs 100 each).

Though the consideration paid by ITC is not available (based on the press release), taking into account the shares outstanding and the current traded price i.e. Rs 52, the outgo is Rs 2.7 bn. If one were to add Rs 930 m paid towards acquiring the preference shares also into consideration, the total outgo stands at Rs 3.6 bn. Based on FY05 sales of Wimco, the acquisition price is at a market capitalisation to sales multiple of 2.8 times, which is a considerable premium in our view.

How will it help ITC?
Currently, ITC has around 11% market share in the safety matchstick segment. Post this acquisition of Wimco, ITC will be the market leader with over 24% share. Perhaps, this explains the premium paid by ITC towards the acquisition. Also, considering the reach of ITC in the rural areas, the deal is a great boon to the company. We continue to remain optimistic about the company’s growth prospects over the long-term.

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