Zydus Cadila group on Wednesday acquired the consumer brand business of Kraft Heinz in India — including children’s energy drink brand Complan — for Rs 4,595 crore. Zydus Wellness Ltd, which spearheads the consumer business of the Zydus group has signed an agreement to acquire the subsidiary of Kraft Heinz, Heinz India Private Limited jointly with Cadila Healthcare Ltd. In an exclusive interview to CNBC-TV18, Sharvil Patel, MD, Cadila Healthcare said he expects the combined entity will generate annual revenue of Rs 1,700 crore. Patel also said it is a tremendous opportunity to scale the business up leveraging the backbone of its pharma legacy as well. Edited Excerpts: Can you throw some numbers, can you confirm how much you have paid for this particular acquisition? You are talking about it this being e arnings per share (EPS) accretive but what will the margins of the combined entity look like and what is the growth that you are expecting from the Complan business considering that growth for the entire segment has been quite flat for the last three years?
We have acquired 100 percent business of Heinz India Private Limited, which carries four brands - Glucon-D, Complan, Nycil and Sampriti. The combined value that we have paid for this transaction is Rs 4,595 crore and it is both the combined entity with Zydus Wellness will have a margin of Rs 350 crore EBITDA and a total turnover of about Rs 1,700 crore. It will put us at more than 20 percent net margin.
Just wanted you to run us through the exact structuring of the deal. We do understand that there are several private equity players who will be helping you back this deal, can you give us the details?
Currently, it is in the early stages. This transaction will be a mix of debt and equity. The finer details of it still need to be planned out but we have a keen interest from a couple of PE players whom we are in advanced discussions with. So it will be a mix of equity and debt, which will be used for the transaction.
Regarding the earlier question in terms of the growth for the products that we acquired, I think there is significant under-penetration for many of these brands. Also, these are leading brands in their respective categories and with a very high recall closer to 98 percent recall for all of the brands. We can see tremendous opportunity to scale this business up leveraging the backbone of our pharma legacy as well.
I wanted to dwell a little bit in terms of how exactly Cadila Healthcare would be involved in the structure of the deal. Currently, what would be the debt that you have on your books and how much would you probably incrementally need to take in order to finance this particular deal?
Currently, this is 100 percent acquired by Zydus Wellness through a mix of debt and equity. The Cadila Healthcare being the large shareholder of Zydus Wellness will also look at ingesting some equity subject to approval of board and other matters but largely the transaction will be funded through debt and equity and with the PE involved as well.
On Cadila's point of view, we have comfortable cash flow positions, we have enough leverage still left. We are at only 1.3 times net debt to EBITDA so we have still further room to expand but the large part of the transaction is going to be consummated through Zydus Wellness.
There are two primary concerns with regards to Cadila Health right now, is that the company's balance sheet should not be leveraged for an acquisition incremental in the FMCG space, so currently your debt stands at around Rs 5,165 crore gross debt but what would be the incremental debt in case of whatever the structure might be for Cadila Health, which you would probably have to undertake, that is the key concern that the street has right now?
It will not be significant and the details of the structure will still need to be worked out and subject to the approval of the board of Zydus Wellness and Cadila Healthcare but as I said, most of the transaction would be funded through Zydus Wellness.
Would you eventually in some form or manner dilute your stake in Zydus Wellness beyond the 72 percent that Cadila holds?
It is too early to talk about that right now.
I just wanted to understand going back to the private equity players that will be investing along with you in terms of financial backing, when will this transaction be closed because you mentioned that the deal will be closed early next year so will the funds flow in before that and what kind of role will the private equity player have as far as the entity is concerned?
We are hoping the deal will close in Q4 of FY19 subject to the regulatory approvals that are required and the funds will be required at that point in time and not before.
As far as your overall portfolio is concerned, you have brands like Sugar Free, Nutralite, Actilife and how will it build synergies with Kraft Heinz portfolio and what kind of strategy do you have for these brands going forward?
I think it has been very good because to acquire large brands is very difficult in the current consumer space at the right valuation. So with the acquisition, the combined entity will have five of the seven brands, which will be number one ranked brands in the country.
The combined distribution will be 2.5 lakhs of direct cover, the combined distribution would go up to 4.5 lakh and there is significant coverage in Heinz when it comes to grocers when it comes to Wellness, the chemist and the cosmetic channel. So there is a great synergy on the distribution side where we will be able to leverage the capabilities to expand Zydus Wellness brands into the grocers' channel whereas the other brands into the chemist and the cosmetic side of the channel.
So both of those have tremendous opportunities, again on the distribution side we have common distribution centres where there can be good synergies that can be created by merging some of these distribution centres as well and most importantly, I think the way we have envisaged this as both businesses are going to be the growth drivers for the organisation.
So with the help of the teams both in Zydus Wellness and Heinz India we would run these businesses independently in the beginning to make sure that we are able to extract growth for both the businesses through the respective field forces.
The normal guarantees. Cadila Healthcare is also a signatory to the overall deal. So they are also part of the SPA.
Any corporate guarantees that Cadila Health will be extending?