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A Case Study on Acquisition of Personal Care Brands of Paras from Reckitt Benckiser

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Maricos History
Genesis In 1990, (not so long ago!); Marico was born and newspaper advertisements dramatically announced 200 Employees Walk out of Bombay Oil. This was the result of the vision of the audacious entrepreneur, Harsh C Mariwala. He strived for over two decades after joining the family business in 1971 to finally create a distinct identity of a successful brand based company known as Marico (a name lovingly given by the then employees of the FMCG division of the diversified family business known as The Bombay Oil Industries Limited (BOIL)).

From that point on, Marico never looked back. By 1996, Marico became a worthy adversary to large competitors such as HLL (now HUL) and ITC. It extended its brand portfolio from two (Parachute and Saffola) to six (Sweekar, Hair & Care, Revive and Sil) brands. All six of these brands were No. 1 or 2 in their respective market segments. Maricos Sales turnover grew from INR 159 Crores in 1992 to INR 348 Crores by 1996, a CAGR of 22% accompanied by growths in margins, and post tax profits and ROCE that were the highest amongst its FMCG peers.

Going Public Registering impressive business growths, brand successes and enviable financials in a short span of time did not go unnoticed. Several public recognitions, awards and commemorations followed. The time was ripe, Marico went public in March 1996; the issue was oversubscribed twice notwithstanding the premium and depressed stock market conditions of the year 95-96. Coming of Age Around the turn of the century, HLL had launched an offensive and public strategy of becoming the category leader in all conceivable consumer goods categories. MNCs like Colgate were ambushed and had to lose market share. Marico was said to be one of the primary acquisition targets of HLL. HLL attacked Maricos resource engine Parachute with 2.5X to 3X times discounts to trade and pumping in 2X times advertising spends. Marico launched Parachute ki kasam, extensive strategic plans were drawn out for market to market combat; Marico went to war at the marketplace and won it. By 2005, Marico touched the INR 1000 Crore mark in revenue, increased its profits by almost twelve times, reached 17 Lac retailers through 3600 distributors and had twelve brands, all no. 1 or 2 in their categories. Now it was Maricos turn to go on the offensive; Marico acquired the HLL perfumed coconut oil brand called Nihar. It was a whopping INR 216 Crore deal, by far the highest in the history of FMCG brands, for an annual turnover of INR 120 Crore. The Company was able to successfully integrate it to the business and reap synergistic benefits.

Nihar strengthened Maricos no. 1 position in the branded coconut oil space and provided market leadership in the perfumed coconut oil category. Nihars tremendous distribution strength bolstered Maricos retail reach in the East and North where Maricos distribution was weaker as compared to markets in West and South. This was the first big acquisition and early success tasted sweet. The organization became experienced in the art of evaluating a strategic fit when it saw one, making the deal and successfully integrating it. This was followed by many international acquisitions in emerging markets, all quite successful which made the organization an Indian Company with significant international operations.

The Big Move

In the year 2010, Maricos M&A team thought there was an opportunity in the Personal Care portfolio of Paras Pharmaceuticals, a company in which Actis, a PE firm, held majority stake. Later that year, Actis decided to exit Paras Pharmaceuticals. Apart from the personal care portfolio however, the asset put up for sale included a list of OTC brands. That made the potential size of the acquisition too large and at the same time included parts with a lower strategic fit for Marico. A few months later, on 9th December of the same year, Reckitt Benckiser acquired both OTC and the personal care products of Paras pharmaceuticals for over INR 3000 crore. Personal care brands of Paras were understood as a strategic fit among the small team which worked on Project Baseball, the team which worked on evaluating Paras as a potential acquisition. The team understood the immense value that the personal care brands of Paras could bring in. Set Wet, Zatak, Livon, were strong brands which could bring a whole new youth portfolio launch pad that the organization had been looking for so long now. There were also the advantages of demographic dividend which the portfolio was to offer, not to mention the tail-wind high growth categories in which the brands operated. The growth rates of the categories were far higher than the categories in which Marico operated. These brands also provided an opportunity to enter the male grooming category which was Marico Internationals area of expertise in the Vietnamese and Malaysian markets under the brands X-Men and Code 10. The fact that this acquisition made Marico a market leader in at least two out of the four major categories- post wash hair conditioner (Livon together with Hair & Care Silk n Shine) and hair gels (Set Wet

Gels and Parachute Advansed Gels)- was another point in its favour. Another advantage was the benefit in A&P costs the acquired brands would enjoy when clubbed along with Maricos spends - providing economies of scale in categories that required higher A&P. The team called the RB headquarters in London to check on the possibility of their divesting the Personal Care brands of the Paras portfolio. The teams optimism turned out to be well founded. RB indeed had put the personal care business on the block due to inconsistency with their overall organizational strategy. This was the big move Marico had been waiting for, a rare opportunity to acquire a personal care business of such scale.

Rationale Behind the Move

This section has a short write-up on the evaluation the organization did for the acquisition in 2010-11:

Category Analysis
Deodorant The Deodorant market experienced a CAGR of 52% between FY 2007 and 2011 with the total value of the market reaching INR 11.4 Billion. This category is characterized by very strong growth and significant competition.

Management refers to RBs management

Per Capita annual deodorant consumption by retail sales in 2011, in US $ per capita

As can be seen from the graph, the stage of development as measured by penetration levels or per capita usage varies significantly by country. Developed markets in Western Europe and North America are characterized by higher male attention to personal care, exemplified by higher consumption per capita. In comparison, developing markets particularly India have significant growth potential in the medium and long term from currently relatively low usage levels. Historical experience of the growth curve in developed markets suggests that once critical mass is achieved, usage grows very quickly. For example, per capita consumption of deodorant in Brazil has surged over the past decade, growing almost five fold from US $ 4.2 in FY 2001 to US $ 19.1 in FY 2011. The current consumption level in Brazil even surpasses markets like the USA or the UK, where penetration levels are around 90% since Brazil has very high penetration levels of almost 100% and an average deodorant usage of twice a day due to hot weather and high cultural importance of fragrances.

In India by comparison, deodorant penetration is currently still low. Even in the business target market of men aged 15 to 35 in SECs A and B, penetration remains as low as 16%. In a recent survey by IPSOS Indica, research found evidence that deodorants are fast becoming viewed as daily essentials in the aforementioned market, with males aged 15 to 35 years open to trying deodorant products. With a relatively untapped market coupled with the fact that it is rare for someone to start using deodorant regularly and suddenly stop, the Indian deodorant market offers significant upside potential and growth prospects. With retail sales of INR 9.2 Billion, spray deodorant market in India represents 80% of the category value. Spray deodorants are very popular in India as they are considered more practical they can be bought and shared easily and hygienically with siblings or other family members. This also makes sprays a more economical option compared to roll-on versions, further increasing its accessibility and appeal. In addition, Paras PCs consumer research found that in warm and humid climates such as India, roll-on deodorants can trigger an itching sensation, causing roll-on deodorants of some competitors to fail in India. Advertisements have also focused on the deodorant spray market, further strengthening its popularity over its roll-on counterpart. As such, the spray/aerosol market has grown far faster and this trend is expected to continue in the foreseeable future. The

retail sales share of roll-on deodorants declined from 2.0% to 1.6% during the twelve month period between July 2010 and June 2011. Deodorant markets can be divided according to prevailing inherent preferences by consumers, traditionally a function of cultural norms. A number of markets including USA and UK are characterized by consumers who are driven by the efficacy of their personal care products and are seen to value performance over fragrance. At the other end of the spectrum are markets, for instance South East Asia and the Middle East, where consumers buying decisions are driven much more strongly by fragrance and image characteristics. The business current deodorant product offering would appear particularly suited to these fragrance-driven markets given its brand image and general perception of Indians regarding deodorants as perfumes while talcum is used primarily for absorption of perspiration. Hair Care Market The daily hair care market in India is a large and dynamic market including conditioners, shampoos and styling agents for daily use. In fact, with total retail sales amounting to INR 67 Billion in FY 2011, daily hair care is the second largest personal care category in India behind bath and shower, accounting for approximately 20% of overall consumer spending on personal care products.

1. Styling agents include hair gels, creams, mousse, waxes, heat protection sprays, gel sprays, gloss sprays and others 2. Conditioners include rinse off conditioners, leave on conditioners, deep conditioners and hair oil

With more products being available to urban, semi-urban and even some rural citizens, hair care products have become an increasingly

regular part of an average Indians daily grooming regimen. A large number of products target major types of hair care application, ranging from ensuring clean and healthy hair to styling and detangling hair. Paras brands have established a presence in three key niche markets: 1) Hair Gel, a specific product group within the styling agent segment 2) Hair Serum, a niche product within the conditioner segment, and 3) Hair Gain, a nascent hair care segment in India Including products such as hair gels, mousse, waxes, gel sprays and others, styling agents are still a niche segment within the daily hair care market. Since FY 2006, however, styling agents have significantly outperformed the markets for shampoos and conditioners with retail sales growing by approximately 28% per annum. The strong dynamic is derived from high consumer engagement with new users entering continuously. Accordingly, per capita consumption of styling agents increased exponentially from INR 0.5 in FY 2006 to INR 1.5 in FY 2011. Increasing penetration is expected to continue delivering superior growth rates for the segment in the foreseeable future.

Growth profile by daily hair care segments in India (1) Conditioners include rinse off conditioners, leave on conditioners, deep conditioners and hair oil (2) Styling agents include hair gels, creams, mousse, waxes, heat protection sprays, gel sprays, gloss sprays and others

Styling products are used to help consumers achieve and maintain their ultimate desired look and can thus generate high customer loyalty, credibility and often a desire to purchase multiple products.

Hair Gel Market Hair Gel and Hair Cream are two major types of styling agents in India. However, hair gel sales have been outpacing those of hair cream due to the gels emphasis on styling, which appeals to the younger demographics, whereas the hair cream focuses on hair nourishment. As the styling agent market remains nascent in India, there is limited competition for hair gel and other potential substitutes such as mousse, wax or sprays. While the hair gel market itself remains under-penetrated in India, its growing popularity amongst young urban males is expected to continue to drive growth. This is evident from the 32% growth in hair gel in FY 2011. Hair Serum Market Geared mainly towards women, hair serum is a specific product group within conditioners. Hair Serum is a solution or gel traditionally applied to hair post wash to detangle it and make it shiny. Some serums include vitamins, proteins or other chemical compounds that nourish the hair. The market remains under penetrated as the frequency of usage of hair serum has been limited by the hair washing habits of Indian women and the growth in the conditioner market. Most Indian women view washing their hair as a time consuming process and endeavor to wash once or twice each week. As hair serum is often applied post wash, this has limited its overall usage in the Indian market. In addition, many consumers do not feel the need to use hair serum if they have already used conditioner. In order to increase the usage frequency, Livon has been advertised as a product that can be used also on the non-wash days to help give a silky and shiny look everyday rather than just on wash days. As a result of this expected change in user habits, management believes that the market of hair serums is deemed to return to strong growth over the coming years. Hair Fall and Re-Growth Market Hair fall and lack of hair growth are two major problems facing many Indian men nowadays. Traditionally, Indian consumers have used hair oil due to its perceived benefits of nourishment and supposed ability to reduce hair fall and promote hair gain. Many hair loss treatments

produced by global brands have been restricted to distribution via chemists only due to their formulations; consumer demands for readily available and accessible products remain largely unmet.

Brand Analysis
Paras brands had established themselves as successful personal care players, driving growth and profitability through product innovation, insightful market research and consistent advertising. Common attributes of Paras product portfolio include: Well established Brand Recognition with category leadership Strong track record of innovation and new product development Strong consumer awareness and loyalty Umbrella brand with strong product extension potential

Paras pursued a consumer oriented strategy focused on developing umbrella brands. The development cycle began with significant investment in market research to identify unmet needs of consumers. From these insights, Paras developed products that addressed these unmet needs and then advertised the products extensively to build brand awareness. The brands were then evaluated by the internal team and following was understood about the two major brands, Set Wet and Livon. Set Wet Set Wet is the flagship brand of Paras and the pre-eminent mens grooming brand in India with a range of offerings including Hair Gels, Deodorants, Shaving Foam &Cream, Perfumed Spray Talcs etc. The brand was launched in 2005 as a contemporary hair gel brand targeting young urban men. The brand name has been derived from the hair gels function of setting the hair by wetting it. Before Paras entered into the hair gel category, it was historically a low growth category due to lack of product innovation or enhancement. Brylcreem had been the clear market leader for decades with limited advertising spends. Seeking an opportunity, Paras identified a changing trend in the urban Indian male who had become increasingly conscious of his image due to high disposable income and the advent of satellite TV.

Set Wets target consumer was a fashion forward and trendy man in his twenties who was concerned about his looks. To successfully address this consumer base, Paras made significant investments in building Set Wets brand image. Paras strong marketing efforts resulted in very high brand awareness. For instance, brand awareness of hair gel increased to 77% in 2008. Amongst hair gel users as well as amongst young men at age 15-24, the awareness level elevated to 86%. Targeted advertising and packaging design fostered consumers perception of Set Wet hair gel as a status symbol with appealing brand attributes like cool, modern, stylish and trendy. This image reflected the sharpness in Set Wets positioning. Approximately 36% of all Indian hair gel users had tried Set Wet hair gel at least once a solid share owing to the brands aspirational image. In particular, the trial rate was approximately three times higher amongst young men 15-24 years of age than for men at 25-35, illustrating Set Wets success in catering to its targeted consumer base. In addition, studies had shown that once consumers tried Set Wet hair gels, the retention rate proved to be very high at 75%. This strong consumer loyalty indicated the strength of Set Wets product performance and its ability to deliver on marketing promises. Initially launched as a hair gel, Set Wet was successfully extended to other categories, including deodorants, shaving products, perfumed spray talc and hair cream. In particular, deodorants had become the largest contributor to the brand. Combined with an early mover advantage among young urban men, Set Wets carefully crafted consumer perception as an international brand enabled it to generate profitable growth through a premium priced offering and capture substantial market share from Brylcreem over the past few years. As a result, Set Wet uccessfully established itself as the leading male hair gel brand in India with 29% market share during the first six months of 2011. Moreover Paras focus and investment into the brand reinvigorated the hair gel category as a whole, spurring growth beyond Set Wet for the overall category. As a result the hair gel market in India was expected to grow in excess of 40% between FY 2011 and FY 2014.

Livon Livon, the leading brand in specialty hair care in India owing its name to the initial product line launched under this brand, is a leave-on hair conditioner for women. At the time of the acquisition, Livon was the second largest brand in Paras Personal Care portfolio. This had three product groups- Livon Silky Potion Hair Serum, Livon Rinse- off Conditioner and Livon Hair Gain Tonic. Livon Silky Potion Hair Serum An iconic hair serum, it had over 64% market share. With the launch of Livon in 2002, it created the category of detangling hair serum in India. Despite the competition, it was successful in maintaining its leadership position in terms of market share.

Livon Silky Potion owed its market dominance to several favorable factors, the most important being the first mover advantage and hence a very strong brand awareness. A major turning point in the history of the brand was when it gained share and returned to a strong growth trajectory. This was due to repositioning of the brand through the Damp-Dab-Dazzle campaign, where it was positioned as a serum to be used on both wash and nonwash days. It increased the frequency of hair serum use and hence consumption.

Livon Rinse-off Conditioner In 2009, Paras Personal Care launched the second product line under the Livon brand, a rinse-off conditioner to capitalize on the fast growing acceptance of conditioners as part of a regular hair care regimen. Enriched with ceramide and natural extracts to revitalize hair, Livon conditioners targeted the consumer group of urban women between 18 and 40 years old. The business also developed four different product formulations to address specific consumer needs (frizzy hair, dull hair, dry hair and fine hair with low density). Livon Hair Gain A highly efficacious product operating in the hair fall and re-growth category, it was clinically tested to accelerate hair growth by improving the anagen and telogen phase ratio of hair by 25% within 90 days of use. It was perhaps the only product which offered the benefits of both hair fall control and hair growth. It had been positioned in the premium price segment charging Rs 600 for 150 ml bottle.

Annexure
Maricos Nihar Acquisition
Context: Marico had issued an Information Update on January 24, 2006 covering the developments until that date, primarily its financial results for the quarter ended December 31, 2005. Executive Summary: Marico announced the acquisition of the brand Nihar from Hindustan Lever Limited in the last week of January 2006. When the process of the brand transition had significantly moved ahead, along with documentation and other formalities, Marico shared greater details about the acquisition- how the acquisition may be financed and how it will contribute to Maricos growth and creates value through increased turnover, market share, synergies across value chain and tax benefits. Nihar added about 10% to Maricos turnover. With this, Marico targeted growth of about 25% in topline during FY 07. Market Shares and Turnover: During the time of the acquisition, Nihar operated in two categoriescoconut oil and perfumed hair oils. It had a strong franchise in the Eastern region, where Maricos brands were relatively not as strong as in the rest of the country. In the coconut oil category, Nihars all-India market share was ~9%. Maricos Parachute was already the major player in coconut oil with over 50% market share in this Rs 800 crore category. In perfumed coconut oil, Nihar, with two variants (Jasmine and Rose) was the market leader with 40% market share. Parachute Jasmine had a 35 % share. The acquisition of Nihar thus enabled Marico to become a clear leader in this category too. How did the Acquisition help the Brand grow: Nihar did not fit into HLLs portfolio and therefore received a relatively low focus leading to its divestment as a part of HLLs brand

rationalization exercise. The focus that Marico was to provide to the brand would have led to harvesting its potential for growth. During the first full year of operation in FY 07, the brand was thus expected to deliver about Rs 120 crore of turnover, about 10% of Maricos revenue. Marico followed a twin brand strategy- invest in and promote both Parachute and Nihar in the coconut oil category and Parachute Jasmine and Nihar Perfumed Oil in the perfumed coconut oil category. Over the next few months, it planned to conduct prototypes and experiments in the market place before firming up its long-term strategy in these two product categories. Synergies: Apart from the incremental turnover and profits that the acquisition brought directly, Marico was expected to derive significant synergies: 1. Nihars distribution reach, particularly in Bihar and Jharkhand would give other Marico brands a larger base to ride on. 2. The incremental throughput increased the turnover of Maricos distributors and their earning potential through Marico, leading to increased trade equity for Marico. 3. Backroom cost advantages, given Maricos scale of operations and its high focus on coconut oil and hair oils. Placement vis--vis Competition: HLL had signed a 5-year non-compete in the pure coconut oil category (Maricos largest segment). Also strategically, it was important to Marico acquiring Nihar rather than letting it fall into the hands of any current or prospective significant player in the FMCG industry. Financials: The acquisition comprised the transfer of several assignable rights relating to the brand Nihar. These included trademarks, copyrights, design rights, know-how, internet domain name, business rights and a 5-year non-compete in the filtered coconut oil category. Taken together, the consideration was Rs 216 crore, excluding transaction costs of about Rs 11 crore. At the PBDIT level, Marico would have benefitted, as Operating margins in Nihar were higher than the average margins of Marico. While there

was a hit on account of depreciation charged in the books of account, the depreciation on the intangibles provided a tax shield. Thus, although in the short run there was likely to be a net hit at the PAT level, in the medium to long run, this acquisition would create value for the Marico shareholders through increased turnover, market share, and synergies across value chain and tax benefits. Outlook: Nihar was expected to add about 10% to Maricos turnover. With this, Marico had targeted a growth of about 25% in topline during FY 07. The Nihar acquisition was a significant event in Maricos growth journey- it helped the turnover to increase from Rs 1,000 crore to Rs 2,000 crore. This had been a large acquisition relative to the Companys size.

About Marico
Marico (BSE: 531642, NSE: MARICO) is one of Indias leading Consumer Products Group, in the global beauty and wellness space. During 2012-13, Marico recorded a turnover of about Rs. 46 billion (USD 836 Million) through its products and services sold in India and about 25 other countries in Asia and Africa. FY13 financials include Kaya which has been demerged from Marico Ltd effective April 1, 2013. Marico touches the lives of 1 out of every 3 Indians, through its portfolio of brands such as Parachute, Parachute Advansed, Saffola, Hair & Care, Nihar, Livon, Setwet, Zatak, Mediker and Revive. The international consumer products portfolio contributes to about 22% of the Groups revenue, with brands like Parachute, HairCode, Fiance, Caivil, Hercules, Black Chic, Code 10, Ingwe, X-Men, LOvite and Thuan Phat. Maricos focus on sustainable profitable growth is manifest through its consistent financial performance, a CAGR of 19% in Turnover and Profits over the past 5 years.