Does Kenstar’s Product Range Justify Crompton Greaves’ ‘Aggressive’ Bid?
Kenstar Could Help Expand Crompton Greaves’ Distribution Network But How Is It Valued?
Crompton Greaves Consumer Electricals Ltd. is looking to acquire debt-laden Videocon Group's brand Kenstar to get a wider reach in the home appliance market.
The company submitted a bid on 20 September as an expression of interest for the acquisition of Kenstar business and Kenstar brand, Crompton Greaves said in a regulatory filing on Friday.
It has offered Rs 1,400 crore for Kenstar, according to a report by the Economic Times, quoting three people with knowledge of the matter. While most brokerage houses agreed with the rationale for the deal, a few of them raised issue with high valuation offered by Crompton.
Kenstar To Widen Crompton Greaves’ Product Offering
Kenstar has a substantial share of nearly 22 percent in India’s air cooler market valued at Rs 1,200 crore. Kenstar also has a presence in air-conditioners, irons, mixer juicers and other small cooking appliances which can add to Crompon Greaves’ portfolio of products.
Japanese broking firm Nomura estimates Kenstar’s current year’s total realisations to be between Rs 300 crore and Rs 500 crore, with an earnings before interest, taxes, depreciation and amortisation at Rs 75 crore. Kenstar can also bring a well-established network, it said.
Antique Stock Broking also echoed Nomura’s views and said that Kenstar’s network with over 63 sales and service dealers, 425 service franchisees and over 3,500 trade partners will add strength to Crompton’s distribution network.
But Does The Bid Look Expensive?
Nomura’s research July research, which bases its calculations on the assumed offer of Rs 1,500 crore, deems the bid as “aggressive”. The research note said that at Rs 1,500 crore, the deal is valued at trailing enterprise multiple (enterprise value to EBITDA) of 20 times, which would much higher than the recently concluded Havells India’s acquisition of Lloyds AC business at 14.5 times in cash.
Moreover, Nomura said Crompton Greaves will have to double Kenstar’s EBITDA to cover for debt servicing costs.
Given that Crompton is still a net debt company, it will have to borrow to fund this acquisition, and if the numbers are correct as reported in the media, it would effectively mean that while Crompton will have to borrow at 9-10 percent interest cost to fund this acquisition, the EBITDA yield is only 5 percent currently.Nomura Research Note
This also means an erosion for Crompton Greaves’ return on capital employed from 35-40 percent currently to 13 to 16 percent post-acquisition.
Antique Stock Broking, however, values a Rs 1,400 crore bid at enterprise multiple of 18 times, which it said is reasonable given Kenstar’s premium positioning of its products. Antique currently has a ‘Hold’ rating on Crompton with a target price of Rs 235.
Shares of the Crompton Greaves declined 2.6 percent to Rs 217 on Monday, snapping a two-day advance.