CFA Society Singapore
(Jan 9): Private equity firms in Asia, which are sitting on plenty of dry powder, can look to a fresh target in the world’s largest health and beauty retailer. They may get a bargain.
Temasek Holdings is considering selling part of the 25% stake it holds in A.S. Watson & Co, Vinicy Chan and Elffie Chew of Bloomberg News reported Monday, citing people with knowledge of the matter. It paid HK$44 billion ($7.6 billion) to acquire its interest in 2014 from Hong Kong-based CK Hutchison Holdings, which remains the controlling shareholder.
It’s hardly surprising that Temasek is seeking a partial exit. When the Singapore investment firm bought its stake, CK Hutchison said it planned to list the business within three years. That hasn’t happened. More importantly, bricks-and-mortar retailers have lost appeal in the eyes of global investors as more business moves online. That trend is exemplified by Amazon.com Inc, which overtook Microsoft Corp in US trading on Monday to become the world’s largest company by market value.
A.S. Watson is big and profitable, with 14,500 stores in 24 markets. In 15 of them, it’s a market leader, Goldman Sachs Group Inc. said in an August report. In its Hong Kong base, the firm operates the ubiquitous Watsons drugstore chain, as well as supermarkets and electronics outlets. Overseas drugstore operations include the UK’s Superdrug, Germany’s Rossmann and Netherlands-based Kruidvat.
CK Hutchison reported its retail Ebitda rose 15% to HK$7.5 billion in the first half of 2018 from a year earlier, on revenue that climbed 14% to HK$83.9 billion. A.S. Watson is one of the world’s most profitable health and beauty retailers, with an 8% Ebit margin of 7.7% in 2017 compared with 6.4% for Walgreens Boots Alliance Inc., according to Goldman.
None of that has helped reverse perceptions that the future belongs to e-commerce retailers. Global drugstore chains have all seen their values drop since 2014. A.S. Watson has proclaimed plans to open a store every seven hours, an anachronism in an era when more transactions are migrating online.
That’s particularly the case in China, where A.S. Watson’s focus remains on physical stores in a market where online shopping has grown much more rapidly than in the rest of the world. As much as 25% of household and personal care products are bought online in China, versus between 6% and 12% in the US, Europe and the rest of Asia.
While the Watsons drugstore chain is the market leader in China, its share was unchanged at 1.8% last year compared with 2015. No. 2 player Guoda, owned by Sinopharm Group Co., moved up to 1.1% from 0.9% over the same period, according to Euromonitor International.
Little wonder, then, that on a three-year view CK Hutchison’s retail net profit has gone sideways.
A private equity firm is among the more likely buyers for the Temasek stake, given the amount of industry money that’s sitting idle. That said, any acquirer will still be in a minority position, even if the entire 25% is sold. Along with the business’s poor growth prospects, the absence of control is likely to be reflected in the valuation.
This is one retail sale that will need a discount to be attractive.
Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking.