ET Intelligence Group : FMCG giant Procter & Gamble (P&G) has made a mandatory open offer to acquire a 26 per cent stake in Merck’s Indian-listed company as a part of its buyout of the German firm’s consumer healthcare business globally.
The offer is positive for Merck’s shareholders because under the P&G leadership, the stock could be more favourably rated, in kilter with other P&G units such as P&G Hygiene & Healthcare and Gillette India.
The Street welcomed the move, with the stock climbing 19 per cent higher than the offer price of Rs 1,500.36 per share.
Merck has several subsidiaries in India, including the listed company Merck LtdNSE -1.69 %. The open offer is for the listed entity that has two main businesses — consumer healthcare and chemicals. About 77 per cent of the revenues are generated by the pharma or consumer healthcare business.
The company has a Decemberending financial year and reported revenue of Rs 1,119 crore and adjusted profit after tax of Rs 94 crore for 2017. On a trailing twelve-month (TTM) basis, the stock is trading at 31 times earnings and 2.6 times sales at Thursday’s price of Rs 1,791.5.
With P&G taking over, not only are the earnings expected to accelerate, but the Street may also reward the stock with better multiples over a period of time
Both the listed subsidiaries of the US giant — P&G Health and Hygiene and Gillette India — have seen their earnings multiples improve over the years and trade at 75 and 80 times their trailing earnings and 13 and 12 times sales, respectively. The multiples have gradually increased over the years, as can be seen in the accompanying chart.
At the same time, the Street is also hopeful of a better offer given that this is just a mandatory offer, with no premium over the three-month average price.
Merck’s global business was acquired at 4.7 times the sales, as compared with 2.2 times of sales the offer for the Indian business implies. India, given a higher growth market, should deserve better multiples. Also, the Indian business contributes a meaningful 15-16 per cent to Merck’s global consumer healthcare business.
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