Analysts see retail strength, but no synergy in P&G-Merck deal

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MUMBAI: While Procter & Gamble’s global deal with Merck could add heft to retail shelves in India — especially at pharmacies — and strengthen product innovation, analysts and industry observers expect little synergy between the duo’s operations or brands here. P&G will get nearly 52% for Rs 1,300 crore in India-listed drug firm Merck as part of the global deal after its parent bought Merck KGaA’s consumer health unit for $4.2 billion.

P&G will make a mandatory offer to acquire 26% from public shareholders for up to Rs 648 crore, taking deal size to Rs 1,948 crore. P&G sells brands such as Pampers diapers, Gillette razors and Vicks. It can expand its consumer healthcare portfolio with Merck’s over-the-counter (OTC) products Nasivion, SevenSeas, Maxepa and Electrobion.

“Merck’s superior distribution at chemists will allow P&G to enjoy clout in the channel for their products given that some of the segment is heavily skewed towards pharmacy retailing. But there will not be any synergy in terms of product categories or manufacturing efficiencies,” said Abneesh Roy, senior vice-president, institutional equities, Edelweiss Securities.

As a channel, chemists account for nearly 10% of consumer products sold in the country, as part of modern trade or supermarkets. So analysts say if P&G can piggyback on Merck’s distribution, some brands could gain advantage over rivals.

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“GSK Sensodyne has a similar edge over rivals in India; that is reflected in its market share, which is higher than Colgate Sensitive,” Roy said.

The three P&G entities in India have combined revenue of under $2 billion, less than 3% of overall sales. After the transaction, the Rs 1,119-crore Merck will become the fourth legal entity in India for P&G.

Industry officials said the integration in India could be similar to how P&G acquired Gillette in 2005, when it decided to manage the operations of both the companies separately.

“The company has made a transition team globally for the deal and there will be due diligence on integration part for India as well. However, it should take at least a year to reflect any change in the way both companies are operating. Merck will most likely remain an independent firm,” said a P&G official who did not wish to be identified.

The deal follows GlaxoSmithKline agreeing to buy Novartis out of their consumer healthcare joint venture for $13 billion last month. “Globally, there has been growth for products with benefits backed by science.

At the same time, there is an trend of natural and doctor recommended brands. When a consumer products company acquires a pharma or OTC led firm, there is an instant advantage of having superior R&D capabilities which can be used for product innovation,” said an analyst with a domestic brokerage.

Over the past three years, P&G, the world’s largest consumer products maker has been de-prioritising several unprofitable lines of business in India, in line with its global strategy, it hurt short-term revenue growth but led to much more profitable business. The contribution of the business it has been fixing or exiting is about 15% of the total portfolio which impacted sales.

P&G is very efficient in staff costs. Revenue per employee for P&G Hygiene and Healthcare is Rs 6.5 crore, highest among FMCG companies.

For Gillette IndiaNSE 0.01 %, it is Rs 2.8 crore and for Merck, it is near Rs 75 lakh, but expected to improve with P&G taking over, say experts. “This buyout could give P&G new areas for growth. For Merck, the decision is clear — they want to exit non-core business and focus on key pharma business,” said Ankit Bhembre, senior analyst, India Ratings & Research. economictimes