Shares of Dr Reddy's Laboratories rose nearly 3 percent in trade on June 27 after the company announced signing a pact to acquire UK-based Haleon Plc's global portfolio of consumer healthcare brands in the Nicotine Replacement Therapy (NRT) category outside of the US.
At 09.56 am, shares of Dr Reddy's were trading at Rs 6,203.45 apiece on the NSE.
The acquisition also includes the purchase of shares of Northstar Switzerland SARL, a Haleon group company, for a total consideration of GBP 500 million. The total consideration will consist of an upfront cash payment of GBP 458 million and performance-based contingent payments of up to GBP 42 million, payable in 2025 and 2026.
The portfolio to be acquired includes Nicotinell, a leader in the NRT category with a presence in over 30 countries across Europe, Asia (including Japan), and Latin America. Nicotinell is the second-largest NRT brand globally (excluding the US) and holds the first or second position in 14 of the top 17 global markets, with the lozenge or mini lozenge format being the top performer globally.
Additionally, the acquisition also encompasses local market-leading brands such as Nicabate in Australia, Thrive in Canada, and Habitrol in New Zealand and Canada. The deal includes all formats of NRT products, such as lozenges, patches, gums, and pipeline products, in all applicable global markets outside the US.
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ICICI Securities highlighted that the portfolio being acquired generated revenue of approximately GBP 217 million in CY23, valuing it at 2.3 times its revenue. "This valuation is considered fair given the portfolio's global footprint, therapeutic acceptance from the WHO, and around 25 percent EBITDA margin potential," the brokerage stated.
Dr Reddy’s Laboratories has been quite active on the M&A front as it prepares for life post the blockbuster cancer drug Revlimid. "One of the focus areas for the drugmaker is consumer healthcare, and this acquisition aligns with that strategy. With a strong balance sheet and consistent free cash flow generation capability, funding this acquisition will not be an issue for the company," ICICI Securities stated.
However, other brokerages like Jefferies and Nomura do not seem too impressed by the deal. Nomura also stated that it isn't convinced with Dr Reddy's strategic rationale for the acquisition. Even though the brokerage expects this acquisition to be be EPS (Earnings-per-stock) accretive, it feels the ROIC (Return on Invested Capital) is likely to be stuck in high-single digits.
Jefferies on the other hand, feels these OTC brands will require upfront investments, with the impact of synergies likely to reflect only over FY27-28.
Read More | Jefferies issues 'underperform' call on Dr Reddy's, Nomura not convinced on rationale of acquisition
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