25 Sep, 2013
By MG Parameswaran Big acquisitions are in the news again.
Microsoft acquires the devices and services business of Nokia for $7.1 billion.
Verizon decides to buy back 45% of its shares from
Vodafone
for an eye-popping $130 billion. Closer home, Japan's Nissin foods is
planning to buy out Capital Foods (marketer of Ching's Secret), and the
valuation sought is 600 crore, or almost three times the sales value.
And just a few days ago, Suntory, the privately held Japanese company,
bought the brands Lucozade and Ribena from UK's GSK for a reported £1.35
billion ($2.1 billion). The two brands had a sales of £500 million
pounds last year. So the company has, in fact, paid a top-line multiple
of about 2.7 times to acquire the brands. For most of us, these brands
are unknown entities and have a negligible presence in India. Lucozade
is an energy drink, much like Gatorade, and Ribena is a soft drink
concentrate that has a huge following among children in the UK.
Why these brands and why such a price? How does a buyer arrive at a price and when does a seller say 'yes'?
In a seminar my colleagues from Cogito Consulting conduct, the
valuation of a brand is one of the topics that is actively debated by
the participants. Often, when asked 'how do you arrive at the price for a
brand?' the participants offer numerous suggestions: reputation of the
brand; image of the brand; standing in the market; growth trajectory;
sales turnover; profitability, etc.
After much debate, the
group arrives at two key metrics: the top-line multiple, ie, how many
times sales value will you pay; and the bottom-line multiple, ie, how
many times the PAT would you pay. The debate gets heated after that, in
fact. Why should a company pay seven times top-line multiple? Why should
a seller agree to sell at less than three times top-line multiple?
We debate numerous brand acquisition cases - from Coldarin, when it was
sold a decade ago to J&J for a top-line multiple of seven, a record
of sorts, to the price paid by Marico to buy a set of brands from
Reckitt Benkiser, which had acquired them from Paras a few years
earlier.
The final debate hinges on what is the value of the
brand to the seller and what the buyer sees as a potential value that
can be unlocked. Add to this the growth of the brand and the potential
to see the rainbow at the end of the rainbow (interestingly, M&A
advisors are at a loss to value a brand that has shown a decline, but there could be opportunities for astute buyers to
leverage this lacunae in the M&A system).
The parameters for acquisition always start with hard facts such as
sales value (top line), profits (bottom line), growth trend and value of
other assets that will be sold (may include talent if that can be
'sold'; factory; product patents, new products in the pipeline, etc).
But the real fun starts when the buyer starts looking at the strategic
fit the brand will have to its portfolio. For instance, in the case of
Suntory, its portfolio in non-alcoholic drinks is weak, so the
acquisition gives it a position to fight in the energy drink market.
Secondly, Suntory, which incidentally acquired Orangina, a quirky orange
flavoured drink, a few years ago, will now have a portfolio to push to
the retail trade. Given the scale advantage, Suntory may be able to
achieve some scale in manufacturing among the various drinks in its
portfolio.
The two new brands will give Suntory a bigger play
in Europe, definitely. Unfortunately for Suntory, the brands Lucozade
and Ribena have negligible presence in Asia; so this acquisition will
not give it any
leverage
in the growing Asia/Asean region. Lucozade has a presence in the US in
big stores located in areas that have a large European/British
population. But it is not a big seller, compared to Gatorade.
However, Suntory, armed with the $4-billion it mopped up at the IPO
earlier this year, feels Lucozade and Ribena will give its portfolio
enough heft to push for a bigger share of the European/UK market.
Obviously it will exploit
Japan
where Suntory has the second largest share in the non-alcoholic
beverage market. It is possible that Suntory may increase the presence
of these brands in the US.
The rest of the world may have to wait a bit longer to get their hands on Ribena. Or, will I be proved wrong?
(The writer is CEO, Draftfcb Ulka Advertising)
source:
http://economictimes.indiatimes.com/news/news-by-industry/services/advertising/what-is-right-multiple-to-pay-for-a-brand-it-depends/articleshow/23014133.cms?curpg=2
