Record Overseas Bid Lures Nestle to India Deals: Real M&A

The largest overseas bet on Indian consumers is spurring speculation that companies from Nestle SA to Colgate-Palmolive Co. will pursue more deals in a nation where household income is forecast to triple this decade.

Foreign bids for Indian businesses selling food, drinks, cosmetics and household goods already reached a record $5.6 billion this quarter, after Unilever NV offered to raise its majority stake in Hindustan Unilever Ltd., according to data compiled by Bloomberg. With consumer spending growth in India forecast to almost double that in the U.S. over the next five years, health products maker Marico Ltd. and Jyothy Laboratories Ltd., which sells laundry detergent, may be takeover targets for foreign buyers, Kejriwal Research & Investment Services said.

While asking prices for some assets may deter bidders, India’s annual retail sales of $500 billion and an economy driven by domestic consumption rather than exports will lure global brands, said Technopak Advisors Pvt. The country’s middle class is forecast to add the equivalent of more than the entire population of Germany in little more than a decade, and Colgate and Nestle may boost controlling stakes in their publicly traded Indian units as the market expands for products from soap to milk powder, said Emkay Global Financial Services Ltd.

“India, because of its sizeable population, can’t be ignored,” Gaurav Gupta, New Delhi-based senior director at Deloitte Touche Tohmatsu India Pvt, said in a phone interview. “India is offering a great opportunity for companies to be part of the volume growth. You don’t get similar growth in other parts of the world.”

Record Deal

Growth in consumer spending in India will average 8.9 percent in the next five years, compared with 4.6 percent in the U.S. and 3.9 percent in the U.K., market researcher Euromonitor estimates.

Foreign companies -- drawn by this growth potential -- have already spent record amounts on deals for Indian food, drinks, cosmetics and household-goods companies this year, data compiled by Bloomberg show. That’s been driven by Unilever’s April 30 offer of 292.2 billion rupees ($5.3 billion) to raise its stake in Hindustan Unilever Ltd. to 75 percent from 52 percent.

Before Unilever’s bid, cross-border deals for Indian companies in the industry had already reached $3.1 billion in 2012, previously the highest annual total, according to data compiled by Bloomberg that dates back to 2001. Last year’s biggest deal was Diageo Plc’s November offer of 111.7 billion rupees for 53 percent of India’s United Spirits Ltd., a move that will give the maker of Johnnie Walker the top position in the world’s largest whisky-drinking nation.

Spending Power

The bidders are lured by the increasing spending power of India’s consumers, Ankur Bisen, vice president for retail at consultant Technopak Advisors in Delhi, said in a phone interview.

Between 2010 and 2021, India’s middle class -- who earn as much as $5,550 a year -- will swell by 100 million to 570 million, PricewaterhouseCoopers estimated in a June 2012 report. Average household income for the country’s 1.2 billion people may almost triple this decade, Firstcall India Equity Advisors Pvt. said in a May 4 report.

In the next two to three years, Indian consumers will shift from predominantly mom-and-pop stores to being more aware of global retailers and increasingly prepared to buy branded products, according to Gupta, the senior director at Deloitte.

Branded Products

“It’s creating space for more premium products to come in, and hence it’s an opportunity for the smaller players to grow and the more recognized brands from the international market to come into India,” he said. “There is continued interest and there will more international players coming into India.”

Jyothy Laboratories, an Indian maker of household goods such as Ujala laundry detergent and Maxo home insecticides, may consider selling brands or a part of its business, and overseas buyers may be interested, said Arun Kejriwal, a director at Kejriwal Research in Mumbai.

The Mumbai-based company may be open to a sale after its 1.19 billion rupee acquisition of Henkel AG’s local unit and subsequent 35 percent drop in profits in the year through March 2012, he said.

“Jyothy had everything going right for it until it acquired Henkel’s business, after which it went through some tough times,” Kejriwal said. “If someone offered them a price, they could sell a range of products out of the company.”

Targeting Marico

Another target is Mumbai-based Marico, the $2.5 billion seller of cooking oil, hair care products and packed food, Kejriwal said. Marico’s Chairman Harsh Mariwala has indicated he’s open to deals at the right price, Kejriwal said.

“Harsh Mariwala is on record stating that he doesn’t mind divesting some businesses to someone or doing a joint venture with someone if they give him the right price,” he said. “He may have received some interest.”

Jyothy Chairman M.P. Ramachandran and Marico Chairman Mariwala didn’t respond to phone calls requesting comment.

Jyothy fell 2.2 percent to 175.85 rupees at close of trading in Mumbai today, while Marico declined 0.1 percent to 213.65 rupees.

Investor confidence in India’s consumer-goods industry has sent valuations soaring. Jyothy, with a market value of $529 million, traded last week at 66 times profit, more expensive that 95 percent of companies in the Standard & Poor’s BSE 500 Index, data compiled by Bloomberg show. Marico’s price-earnings ratio of 34 also exceeded the median for the index of 14, the data show.

New Interest

It’s not just India’s city-dwellers who are buying more products. Per-capita spending by villagers grew faster than that of urban dwellers for the first time in two and a half decades in the two years to March 31, 2012, according to S&P’s Indian unit Crisil Ltd.

That’s drawn interest from companies including Danone SA, based in Paris, and San Francisco-based Del Monte Corp., which have customized products to match Indian tastes, said Sujay Kotak, Mumbai-based assistant vice president at Singhi Advisors, an investment banking and corporate advisory firm.

“We’re seeing a lot of interest from mid-market and large companies based out of Europe and U.S. that are looking at India,” Kotak said by phone. “At the right price, there could be deals, but there could be smaller joint ventures or partnerships.”

The next buyers may be Nestle, the world’s largest food maker, and Colgate, the maker of its namesake toothpaste, Irish Spring soap and Ajax house cleaner, Pritesh Chheda, an analyst at Mumbai-based Emkay, said in a phone interview. Chris Hogg, a spokesman for Vevey, Switzerland-based Nestle, said the company doesn’t comment on speculation. Representatives at New York-based Colgate didn’t return a phone call seeking comment.

Nestle, Colgate

Nestle controls 63 percent of Nestle India Ltd., which has a market value of about $8.6 billion, data compiled by Bloomberg show. Sales and profit at Nestle’s Indian business have more than doubled in the past five years, the data show.

At Colgate-Palmolive (India) Ltd., 51 percent-owned by Colgate, revenue doubled while earnings almost tripled in the five-year period, according to the company’s 2012 annual report.

The day Unilever’s Indian investment was announced, Nestle India shares jumped 5.2 percent for the biggest gain in almost two and a half years, while Colgate-Palmolive (India) rose 5.8 percent, the most since June 2011.

Nestle India fell 1.1 percent to 4,848.20 rupees today, while Colgate-Palmolive fell 0.7 percent to 1,530 rupees.

“India’s demographics -- where we have the world’s largest young population, the world’s largest middle income group population -- makes it most attractive for these companies to target India,” Kejriwal said.

Before it's here, it's on the Bloomberg Terminal.