FMCG firms rev up acquisition tempo

Even as R K Krishna Kumar, vice-chairman, Tata Tea, announced that the Tata Group had sold its 30 per cent stake in US-based beverage maker Glaceau, he sent out a strong message that the group is still hungry for acquisitions in the beverages space.

While a couple of names such as Cadbury Schweppes and Rooibos, a speciality beverages brand is doing the rounds as possible acquisition targets, the company did not offer any comment.

Tata Tea's reaction sums up the current mood in the FMCG sector. Till a couple of years ago, the industry was struggling to shore up margins and volumes as consumer demand was sluggish. However, it has now managed a complete turnaround.

With substantial cash reserves, a buoyant domestic market and increasing global opportunities, almost every consumer goods (FMCG) company is looking for acquisition targets. And the action is unlikely to remain restricted to India.

"There are few options in India. We will look at international targets," Adi Godrej, chairman, Godrej Group, told analysts recently.

The action is slated to spread across both food and personal product categories, with companies such as Hindustan Unilever, Procter & Gamble and Britannia on the lookout for brand acquisitions.

There are enough reasons for companies to scout for acquisitions. Growth is certainly one of them, as the FMCG business is all about size.

And Indian companies are lagging behind in that respect. Harish Manwani, chairman, Hindustan Unilever, recently told his shareholders, "Our growth of Rs 1000 crore in 2006 was equal to the total annual turnover of many of our key competitors." HUL's turnover in 2006 was Rs 12,100 crore.

HUL's key competitors in India, ranging from global arch-rival Procter & Gamble to home-grown

companies such as Godrej and Marico are keen to close the wide gap, say analysts.

"The growing revenues and profitability have resulted in high cash reserves. There is also easy access to private equity funds, which makes it easier for companies to fund acquisitions," said Deepesh Garg, director, o3 Capital Advisors.
In the current situation, where the industry is growing at double digits, the management bandwidth required for organic growth is relatively low, say industry watchers.

As a result, companies are keen on utilising the experience gained in the domestic market, internationally. "Further, if they can leverage synergies by shifting manufacturing to India, this works well for the Indian company," said Garg.

Godrej said acquisitions would constitute a majority of the company's investments during the current financial year.

"We will be investing in brand acquisitions and are looking at high-growth markets such as Indonesia, Malaysia and China," said Godrej. The company has already acquired Keyline Brands in the UK and Rapidol in South Africa during the last two years. Godrej said that his company would look abroad for acquisition targets as there was a dearth of good targets to acquire in India.

D Sundaram, director-finance, Hindustan Unilever, said the company was open to acquisition opportunities. It is also said to be keen on rationalising the existing brand portfolio. Brands which have been put on the backburner could see a change in ownership soon.

In the foods space, Godrej Beverages and Foods (now Godrej Hershey's Foods & Beverages) and Britannia are on the lookout for further acquisitions after acquiring Nutrine and Daily Breads respectively.