Provides attractive exit for Zandu Pharma shareholders.

BL Research Bureau

The sharp upward revision in the open offer price by the Emami group to mop up a 20 per cent stake in Zandu Pharmaceuticals provides a good exit opportunity to Zandu’s shareholders, but escalates the acquisition price for Emami.

Emami has this week announced a big upward revision in the price for the mandatory open offer for Zandu, from Rs 7,315 a share to Rs 15,000 a share. The revised offer price (of Rs 15,000 a share) values Zandu at about Rs 1,210 crore. This translates into a multiple of about seven times Zandu’s annual sales and values the company at about 73 times its earnings for 2007-08. This is obviously at a huge premium to FMCG companies in the listed space, which trade at 22-25 times their historic earnings. Expectations of a revision in the offer price have already driven the Zandu stock steadily upwards in recent weeks; this provides a good exit opportunity for Zandu shareholders.

However, the huge control premium being paid by Emami for this relatively small-sized acquisition could cast a damper on its own stock. The valuation for this buy appears stiff, considering Zandu’s relatively small size; the buyout could also entail equity dilution for Emami, as it may be financed through private placement.

Valuations apart, Zandu’s product portfolio does appear to be a good fit for Emami as Zandu’s herbal plank and complementary products (Chyawanprash, pain balm), may help add market share. Zandu has sustained reasonable growth in both sales and profits over the past five years with healthy operating profit margins of 16-18 per cent.

(This article was published in the Business Line print edition dated September 17, 2008)
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