A reasonable valuation and addition of complementary products to its existing portfolio makes the Heinz acquisition a sweet deal for Zydus Wellness.

The acquisition of the Complan, Glucon-D , Nycil and Sampriti brands from Heinz India works well for Zydus Wellness both financially and strategically. For one, much like Zydus’s own portfolio of health /nutrition brands such as Sugar Free and Nutralite, Complan and Glucon-D belong to the premium health foods/drinks segment. Zydus’s existing market leadership position in sugar-free (94 per cent market share) and nutralite ( 39 per cent market share) can be leveraged to give the Complan brand a lift.

The Nycil brand will also complement Zydus’ existing foothold in the personal care segment through its Everyuth brand of facial scrubs/cleansers.

While Complan is the flagship for Heinz, currently bringing in about 40-50 per cent of the revenues for the company, it faces stiff competition from Horlicks which is the market leader in nutrition drinks; Complan’s market share currently is only around 10 per cent. Whether Zydus is able to push up market share of Complan and derive synergies from the other acquired brands needs to be seen. Belonging to relatively premium segments, Heinz’s four brands collectively sport a robust EBITDA margin of 19.5 per cent. But Zydus Wellness currently sports higher EBITDA margins of 25-30 per cent. Higher advertising and marketing spends on the newly acquired brands may dent margins.

Reasonable valuation

However, the acquisition is not overpriced. Considering the acquisition cost of ₹4,595 crore, Heinz’s net working capital of ₹40 crore, cash of ₹15 crore and EBIDTA of ₹225 crore as of end-June 2018, the Enterprise Value / EBITDA multiple for the deal works out to about 20 times. There are no similar deals in the recent past that can serve as a benchmark for valuation.

However, the deal appears reasonable when compared to the valuation of GlaxoSmithKline Consumer Healthcare, which is in somewhat similar business selling health foods/drinks (Horlicks, Boost, Maltova) and over-the-counter medicines (Eno, Crocin,,Otrivin). GSK Consumer’s EV/EBITDA (trailing 12 months) stands at 28.7 times. The deal valuation is also at a discount to bigger players in foods such as Nestle (33 times) and Britannia (42 times).

Zydus Wellness is acquiring this business jointly with Cadila Healthcare and it is proposed to be financed by a mix of debt and equity. While the exact contours of the financing are not out yet, Zydus’ s financial position remains strong. The company has a low debt-to-equity ratio of 0.04. For the year ended March 2018, the company’s net sales grew by 19 per cent to ₹513 crore and net profit, by 23 per cent to ₹134 crore.

Given that the four brands of Heinz account for ₹1,150 crore of revenues, there will be a substantial rise in revenues for Zydus post the acquisition.

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