Reckitt wins tussle for India’s Paras

Reckitt Benckiser, the household products group, has trumped multinational and domestic bidders by agreeing to pay Rs32.6bn (£454m) for India’s Paras Pharmaceuticals.

The tussle for Paras, which combines an over-the-counter drugs business with branded personal care products, reflects a desire to tap the fast-growing Indian market, described by Bart Becht, Reckitt chief executive, as “one of the most promising healthcare markets in the world”.

The deal also demonstrates Reckitt’s growing interest in OTC drugs.

Mr Becht said: “The acquisition of Paras is another step forward in Reckitt’s growth strategy in consumer healthcare.”

Reckitt bought the Indian group, which generated Rs4bn in sales in its last fiscal year, from Actis, the emerging markets-focused private equity company that owns 63 per cent of the company, and from minority owners Sequoia Capital and Girish Patel, the founder of Paras.

Analysts described the price tag, at 30 times trailing earnings before interest, tax, depreciation and amortisation, as full. Chas Manso, Evolution Securities analyst, estimates Reckitt will need to quadruple Paras’ ebitda (of Rs1.1bn in the year to March) to cover its cost of capital, assuming a 9 per cent weighted average cost of capital.

Sarabjit Kour Nangra, a pharmaceuticals analyst at Angel Broking in Mumbai, said: “Although the valuation might look high, it makes sense as it factors in India’s strong growth story.”

The deal follows a series of acquisitions and partnerships between Indian and foreign companies this year, including Abbott Laboratories’ acquisition of Piramal Healthcare for $3.7bn (£2.3bn) in May.

Other groups that have sealed partnerships include GlaxoSmithKline with Dr Reddy’s Laboratories, and Pfizer with Aurobindo and Claris Lifesciences.

Reckitt was advised by JPMorgan, while Paras shareholders were advised by Morgan Stanley.

Reckitt shares closed 64p higher at £35.73.
● FT Comment

Paras ticks two boxes for Reckitt. First, drugs have been good for its shareholders; not just the heroin substitute Suboxone but also OTC drugs such as Nurofen. Second, Reckitt is a relative laggard in emerging markets, which accounted for just one-fifth of net revenues last year. Paras hasn’t come cheap. The enterprise value/ebitda multiple of 30 times is almost 50 per cent more than the multiple it paid for condom and sandal maker SSL. But that comes out in the wash when you turn over £12bn and excel at squeezing out synergies. The real question is Reckitt’s ability to manage a far-away business with its own demons: Evolution Securities’ Chas Manso notes that one of Paras’ founding brothers has set up a rival company. Business in India, as Procter & Gamble and Unilever among others have learnt, is seldom plain sailing.