DR REDDY'S LABORATORIES TO ACQUIRE NICOTINELL FROM HALEON — HERE’S WHY ANALYSTS ARE DIVIDED
Dr Reddy's Laboratories (DRL) on June 26 said it has signed a definitive agreement with Haleon plc—a leading consumer healthcare company—to purchase shares of its group company Northstar Switzerland SARL. DRL aims to acquire a global portfolio of consumer healthcare brands outside of the United States for 500 million pounds.
While DRL's shares rose almost 3% on June 27 after the acquisition was announced, brokerages were divided in their commentary about the deal and the price targets for the stock.
DRL will acquire Nicotinell, the nicotine replacement therapy (NRT) category, and related brands from Haleon Plc.
The total revenue of the acquired portfolio includes 217 million pounds in 2023, 200 million pounds in 2022, and 201 million pounds in 2021. The valuation is 2.3 times the revenue and 9.2 times the EBITDA, or earnings before interest, taxes, depreciation, and amortisation. The key markets are the UK, EU, Australia and Japan.
The pros:
-The acquired brands have roughly 25% market share
-DRL is the second largest player in the key markets
-The acquisition almost doubles Dr Reddy's global over-the-counter (OTC) business (pegged at $300 million)
-The company expects the business to generate a 25% EBITDA margin
-The acquisition is immediately cash accretive
-This is a step towards addressing earning concerns due to competition in Revlimid generic in the fourth quarter of the 2026 fiscal
The cons:
-The acquired portfolio has been growing at lower than mid-single-digit
-The Deal will exhaust 80% of DRL's existing net cash of ₹6,500 crore
-The estimated payback period of 9-10 years is a bit stretched
-This is not in the speciality/chronic portfolio
What do brokerages make of the deal?
| Brokerage | Rating | Target price |
| Nomura | Neutral | ₹6,499 |
| Jefferies | Underperform | ₹5,010 |
| IIFL | Reduce | ₹5,850 |
| Nuvama | Sell | ₹5,028 |
| Axis Capital | Reduce | ₹5,800 |
| Elara | Buy (upgrade) | ₹7,328 |
Nomura: The brokerage points out that Nicotinell is a mature brand and is available in more than 30 countries, including the markets of Europe, Canada, Japan and Australia. Nicotinell, the second-largest NRT brand globally, contributed 80% of the portfolio’s revenue in 2023. Nomura added that Nicotinell recorded a 3.9% compounded annual growth rate (CAGR) in the ex-US market from 2021 to 2023.
Reflecting on the financial impact, the brokerage said the acquisition can be EPS-accretive, but the return on invested capital (ROIC) will likely be in the high single digits. It also believes that the strategic rationale of the acquisition is not convincing.
Jefferies: The brokerage said that the four brands—including Nicotinell—that DRL is acquiring clocked sales worth 217 million pounds in 2023.
However, the growth of these OTC brands has remained stagnant in recent years, and they will require upfront investments. The impact of synergies from the acquired portfolio should be reflected only by the 2027-28 fiscal, it explained.
Axis Capital: It has a "Reduce" rating on the DRL stock and believes that the mature brand will add only limited value to DRL.
DRL shares closed 2.85% higher at ₹6,241.60 on the BSE on June 27.
2024-06-27T11:56:37Z dg43tfdfdgfd