The Hindu Business Line : Dabur's big deal

WHEN Dabur India Ltd (DIL) announced its intention to acquire brands positioned on the herbal plank in the personal and healthcare segments in September last year, the announcement left many in the industry wondering. Where were brands that had perceived equity and potential for further growth? And if such brands were there in the fast moving consumer goods (FMCG) space, wouldn't they be already spoken for? What about ticklish issues such as brand valuation and deal size?

These doubts lingered as no announcement came from the company for more than three months thereafter. And the general lack of acquisitions and mergers in the FMCG segment seemed to prove the sceptics rights — that though DIL was on the prowl, it would find acquisition a tricky business.

But when the company finally announced the acquisition of three Balsara group companies in an all-cash deal last week for Rs 143 crore, industry watchers could not help nodding their approval.

After all, the acquisition is not only synergistic with Dabur's present product mix, it also comes at a time when the company is trying to occupy each price point in the oral care market. The deal also allows DIL to enter the high-growth household product area.

According to industry estimates, the toothpaste market is estimated at Rs 1,900 crore, whereas the combined pie for utensil and toilet cleaners, mosquito repellents and air fresheners is at Rs 2,000 crore. So, in one stroke, the company has gained entry into the latter while consolidating its position in the oral care market, analysts say.

As per the deal, Dabur India will acquire 99.4 per cent stake in Balsara Hygiene Products, 100 per cent in Balsara Home Products and 97.9 per cent in Besta Cosmetics. The company will seek shareholder approval for the deal by April. Till then, it will assume management control at Balsara.

The acquisition is being funded largely through internal accruals, with only Rs 23 crore of the entire amount being sourced through debt.

Dabur CEO Sunil Duggal

"Balsara has a strong range of brands that fit in well with our brand architecture and growth plans in India and abroad. Its range of oral care products will fit in largely under the Dabur brand name, further strengthening our existing position as the third largest player in the oral care market in India," says DIL CEO Sunil Duggal.

To a question whether the company's appetite for acquisitions was sated, Duggal says DIL is open to more acquisitions in areas where the company already operates — personal care, healthcare, foods and now household care.

Dabur expects 10 per cent growth immediately in revenues after this acquisition. Balsara's businesses recorded sales of Rs 199.6 crore in 2003-04 with losses of about Rs 8 crore, Duggal says, adding that the three acquired companies will become DIL's subsidiaries. These could be merged into DIL at a later date.

Pointing out the synergies with DIL, he says this acquisition brings not only a complementary brand portfolio but also economies of scale in marketing, sales and distribution. Balsara has three manufacturing sites at Kanpur, Silvassa and Baddi. Duggal says there are no plans to rationalise manpower at Balsara companies where the total headcount is 600.

This acquisition brings DIL toothpaste brands Promise, Babool and Meswak; Odonil air freshener and Sanifresh toilet cleaner, Odopic dish-washing detergent and Odomos insect repellent.

Terming the acquisition of Balsara's herbal oral care as a "good strategic fit," Duggal says the acquired brands will strengthen the company's existing oral care portfolio and provide DIL with regional saliency. While 45 per cent of Balsara's revenues come from the West and South of the country, DIL's strength lies in servicing the Northern and Eastern markets. Also, the manufacturing facilities of Balsara are expected to provide significant cost synergies and economies of scale to Dabur India.

While welcoming the "risk-taking" ability of Dabur in clinching this deal, SSKI Securities' Nikhil Vora says DIL will have to invest significant amounts in the acquired brands to grow them or be prepared for a long gestation period for the brands to do well.

"And while this is a very positive deal, DIL must remember that it will be a new player in several categories," he cautions.

But while this acquisition makes sense for Dabur, why would Balsara want to divest all its well-known brands? Duggal explains that this was necessitated as the brands needed large-scale investments that the promoters of Balsara were unable to make. Despite several attempts, Balsara officials remained unavailable for comments.

In addition to the oral care and household care businesses, Balsara also operates in the high-growth private label and herbal extracts and complexes businesses. The fate of these two businesses after DIL's acquisition also could not be ascertained.

As per the deal, Dabur will convert all the three Balsara companies into wholly-owned subsidiaries and could consider merging these with itself at a later date.

As of now, DIL will assume management control at Balsara and await the approval of its own shareholders for the deal till April.

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