Godrej to buy out Sara Lee in JV

Jul 20, 2009

The Godrej group will buy out the US-based Sara Lee Corporation's entire controlling stake of 51 per cent in their India joint venture, Godrej Sara Lee, for Rs 880 crore. The Indian group, however, is waiting to see who eventually takes over the US company's household and personal care business, which is up for sale, reports Financial Chronicle.

A senior Godrej official was quoted in the report as saying that the purchase would be at the same price at which Godrej Consumer Products recently bought 49 per cent in the venture from promoting companies, which are also part of the business house. "Once we buy out Sara Lee, we will merge the business with the listed Godrej Consumer Products," the official added.

The deal for 49 per cent was announced on the Bombay Stock Exchange on May 27. Godrej Sara Lee is among the world's largest manufacturer of household insecticides, and owns brands such as Good Knight, Jet and Hit. The company also markets AmbiPur (room freshener), Brylcream (hair styling) and Kiwi (shoe polish), which are licensed to the joint venture by the US company.

Even after taking over the US company's stake, Godrej will continue to enjoy the rights to sell the brands on payment of a royalty. The royalty amount has not been specified in the shareholders' agreement and will, therefore, have to be negotiated, the official said.

A Godrej family member, however, said the group was keeping its options open about the buyout until it was clear who was buying Sara Lee's household and personal care business. There is only a slim chance of Godrej not exercising that option.

The family member said that if the new partner was acceptable to us, then the need to buy out Sara Lee's stake might not arise.

According to him, if the new partner has an Indian business competing with the Godrej group, its acceptability will be determined on whether it is willing to partner the Indian group across a range of businesses where there is a conflict of interest.

To fund the deal the group may raise fresh equity through Godrej Consumer Products, and also debt. "We feel a small portion of the money needed can be raised through equity; a large portion will come from cash in hand invested in mutual funds and other short-term instruments; and the balance from internal accruals and fresh debt,” the official said.

On May 27 Gujarat Consumer Products announced that it would acquire 49 per cent held by Godrej Hygiene Care and Godrej ConsumerBiz in an all-stock deal. Godrej Hygiene Care is a 100 per cent subsidiary of the BSE-listed Godrej Industries. Godrej ConsumerBiz is wholly owned by the privately-owned group flagship, Godrej & Boyce Manufacturing Company.

Sharekhan has valued the 49 per cent stake at Rs 845 crore. Godrej Sara Lee is valued at 2.3 times the market cap to sales and 16.5 times its earnings last year, said a recent research report of the brokerage.

"The valuation parameters in case of one partner buying out the other have been specified in the shareholders' agreement between the group and Sara Lee. These parameters were used in arriving at the value of the 49 per cent stake," said the Godrej official.

An audit and consultancy firm, Grant Thornton, was the independent valuer which determined the share swap ratio. Kotak Mahindra Capital Company and ICICI Securities provided a fairness opinion on the share exchange ratio for the 49 per cent stake.

The promoters feel that post-merger the company will have strong financials that will allow it to take more debt to fund the buyout.

Godrej Sara Lee posted consolidated net sales of Rs 754.65 crore and an operating profit of Rs 134.15 crore.

Godrej Consumer Products, according to the Sharekhan report, had a total debt of Rs 130 crore on a networth of Rs 605.6 crore at of end March this year. Brokerages are bullish on the company acquiring the 49 per cent stake as Godrej Sara Lee enjoys better EBITDA margin.